Daily Update November 7, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Making Sense of Repo Markets

Repurchase agreement markets are a massive, but rarely noted, aspect of the financial system. In simple terms, repurchase agreements (repos) function like a pawnshop. Someone who has securities, such as US Treasurys, but needs short-term cash sells the securities to another party that has excess cash and agrees to repurchase the securities later at a higher price. This functions as a short-term loan. The securities act as collateral on the loan, while the interest on the loan is represented by the difference between the selling price and the repurchase price. In another type of transaction, known as a reverse repo, a buyer purchases securities from a seller and offers to sell them back at a profit later. 

Repo and reverse repo loans are short-duration, typically overnight, instruments. The total volume of repo loans is massive, with $2 trillion to $4 trillion transacted daily. These trades allow financial institutions with idle cash to earn a small return and institutions with somewhat illiquid assets, such as hedge funds, to access short-term cash. Due to the volume of these transactions, repo rates are closely monitored by central bankers since problems in repo markets can be an early sign of illiquidity in the system. In September 2019, a confluence of factors led to a spike in the overnight repo borrowing cost, which reached a high of 10%. When this happens, the Federal Reserve takes a more active role in repo markets, providing either cash or securities to balance the market.

According to S&P Global Market Intelligence’s Repo Data Analytics, the volume of transactions in repo markets in October increased while the rate of interest remained stable. Global repo market activity was up 4.6% month over month, while reverse repo activity was up 1.5%. As usual, most repo market transactions involved government bonds, although high-yield and investment-grade corporate bonds were also exchanged. Regionally, Europe, the Middle East and Africa and Asia-Pacific experienced the biggest increases in repo market activity in October, with Japan seeing the biggest increase in volume and rates. Repo volumes in the US were down slightly month over month.

The global increase in activity came in contrast to September 2023, which was a quieter month for repo markets. In September, global volume was down 12.3% month over month for repo activity and down 3.3% for reverse repo activity. 

In summary, repo markets are like the plumbing of the global financial system: safely ignored unless something blocks up the system.

Today is Tuesday, November 7, 2023, and here is today's essential intelligence.

Written by Nathan Hunt.

Economy

Economic Research: Federal Reserve Holds Rates Steady For Now On Tighter Financial Conditions

The Federal Reserve held its policy rate steady at a 22-year high of 5.25%-5.50% at its latest policy meeting on Oct. 31-Nov. 1. The American economy has had generally stronger-than-expected employment and GDP growth, and inflation progress has slowed since the September meeting. But still, the Fed was inclined to hold rates because financial conditions have tightened sharply. Equities had been down 8.7% since July 31, the last 25-basis-point hike, and, more importantly, the benchmark risk-free 10-year Treasury yield had risen about 100 basis points to nearly 5%.

—Read the report from S&P Global Ratings

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Capital Markets

Residential Mortgage Performance: ‘Like A Rock’ And ‘Still the Same’

Although a reduction in home equity could disincentivize timely mortgage payments, housing fundamentals remain supportive despite regional pockets of weakness. The abnormally wide spread of the 30-year fixed-rate mortgage to the 10-year Treasury note yield continues to strain affordability. Student loan payment resumption is unlikely to cause meaningful mortgage payment disruption. However, there may be minor performance issues in the investor property non-QM subsector.

—Read the report from S&P Global Ratings

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Global Trade

South Korea's Exports Rebound In October 2023

South Korea's exports grew by 5.1% year-over-year (y/y) in October 2023, the first positive expansion recorded since September 2022. The rebound in exports was helped by strong growth in exports of autos and petroleum products. Anaemic economic growth in the European Union (EU) and sluggish domestic demand in mainland China during 2024 remain a key downside risk for South Korea's manufacturing export sector. South Korea's exports to mainland China have remained weak during 2023, recording a decline of 9.5% y/y in October. However South Korea's tourism sector has been strengthening during 2023 and is expected to show further improvement during 2024, as international tourist travel in the Asia-Pacific region continues to recover.

—Read the article from S&P Global Market Intelligence

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Sustainability

Listen: Big Bank Citi Talks Net-Zero Goals, Scope 3 Emissions, Climate Disclosure

This week, the ESG Insider podcast is talking to one of the world’s largest banks about the landscape for climate disclosure rules and standards. Hear from Citigroup Chief Sustainability Officer Val Smith. She talks about how Citi is approaching the energy transition with clients; how investor expectations around climate disclosure are changing; and the challenges of climate data.

—Listen and subscribe to ESG Insider, a podcast from S&P Global Sustainable1

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Energy & Commodities

Listen: European Fuel Oil Sulfur Spreads Caught Between Asia And The Americas

European fuel oil sulfur spreads surged in October as events further afield spurred opposing price movements for low- and high-sulfur fuel grades. A sudden easing of US oil and gas sanctions on Venezuela has sent high sulfur markets tumbling, while a mysterious shift in exports from Kuwait hit low sulfur markets in the Middle East and Asia, all against the backdrop of a gentle wind-down to an unusual European summer.

—Listen and subscribe to Platts Oil Markets, a podcast from S&P Global Commodity Insights

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Technology & Media

Q3'23 US Consumer Insights Survey: Online Video Use Plateaus As Pay TV Plummets

The adoption of subscription video-on-demand and free, ad-supported TV services has plateaued in the US with over 80% of internet households watching online video, according to a recent Kagan US Consumer Insights survey. At the same time, the decline in multichannel TV subscribers accelerated over the past year with barely half of internet households subscribing to a traditional pay TV service.

—Read the article from S&P Global Market Intelligence

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