Analysts are keeping an eye out for signs the financial and economic consequences of Russia's invasion of Ukraine could create the sort of liquidity crisis...
They are not pressing the panic button, but market watchers are keeping their eyes peeled for signs the financial and economic consequences of Russia’s invasion of Ukraine could contribute to a liquidity crisis capable of shaking up already rattled global financial markets.
”The largest factor driving the funding market stress was the uncertainty of any contagion effects on global financial markets from sanctions, and the risk that missed payments due to the locking up of Russian-controlled dollars might have a cascading effect,” said John Canavan, lead analyst at Oxford Economics, in a Wednesday research report.
Opinion: Sanctioning Russia is a masterstroke that will cement the dollar’s dominant role in world affairs Tracking the basis Among other market indicators, it’s worth keeping an eye on cross-currency basis spreads, Barrow said, which measure the cost of securing dollars through the currency market. During periods of stress, getting access to dollars through the interbank lending market may become a challenge and/or expensive, leading borrowers to turn to the foreign exchange market.
Meanwhile, the uncertainty about the impact of Russian sanctions will likely ”keep dollar demand strong, which will sustain modest stress on short-term funding markets,” said Oxford Economics’ Canavan. ”In turn, that is likely to keep volatility elevated over the near-term, leaving Treasury yields at risk for larger swings,” he said.
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