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The collapse of oil prices looks more like forced liquidation than adjustment to new supply-demand information. Maybe the Iranians can’t afford to keep 13 million barrels sitting offshore in VLCC’s. Maybe some trading positions are being liquidated.

In any case, close attention should be paid to balance sheet constraints and liquidity

There are two consistent predictors of US real yields that stand up to correction for serial correlation: fed funds futures and the cross-currency USD-EUR basis swap.

A note of caution: This isn’t the sort of “liquidity risk” conventionally measured by market spreads. The Bank of America Liquidity Risk Index ticked up recently but seems benign compared to 2016

Ominously, though, European swap spreads have widened steadily during the past year, and they have traded inversely with SX7E. This strongly suggests that the widening swap spread is a function of rising bank risk.

This can’t be good, and it could turn very bad.

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