A common question in recent weeks is whether today is like 2008? The price action is certainly reminiscent of the wild intra-day swings in the stock market we saw back then, with the level of the VIX, which closed at 83.6 recently, greater than the previous all-time closing high at 81.5 in 2008. Nonetheless, in 2008 the very integrity of the financial system was in question. US and European banks were highly leveraged and, given the complexity of various derivatives linked to the US housing market held on (and off) their balance sheets, nobody wanted to lend to anybody. US banks – still the most important for the global economy – are now more resilient, being subject to stricter regulation and with much more capital on their balance sheets. Today, the building may be on fire, but unlike 2008 the very cladding itself is not flammable.

Funding pressures that are building today are mainly in offshore USD markets. The top chart shows that in 2008 LIBOR-OIS and HY spreads blowing out together; today LIBOR-OIS has widened, but less so than in 2008. HY widening is more concerning. Basis swaps are also widening bottom-left chart), but so far demand for dollars is less acute than in 2008. There is more pressure on EM FX basis swaps (eg KRW) as demand drops off for intermediate goods, leaving producers susceptible to a USD squeeze. As we saw over the weekend, the Fed extended (longer and lower) dollar swap lines to some central banks to help ease offshore funding.

Source: Bloomberg, Macrobond and Variant Perception