Positive results from US banks accentuated the divide with Europe and Japan. Earnings for the six largest US banks met or beat expectations in the second quarter, while most of the industry fared well in the Fed's stress tests, with the exception of the subsidiaries of two European banks. Net interest margins have remained substantially flat since the December rate increase by the Fed.
Recent strains in money markets added to this overall adverse landscape. The three-month US dollar Libor-OIS spread soared from 25 to about 40 basis points from early July to the end of August (Graph 10, right-hand panel). In the past, spikes in this gauge have been associated with concerns about counterparty credit risk, particularly during the GFC and the subsequent sovereign debt crisis in Europe. This time around, the increase seems to be mainly related to regulatory reforms designed to improve the resilience of the US money market fund (MMF) sector. In particular, starting on 14 October 2016, new rules will require prime MMFs (which invest in non-government assets) and tax-exempt institutional funds to adopt a floating net asset value structure. Moreover, they will be allowed to impose redemption gates and liquidity fees in the event of a large increase in outflows.
In anticipation of these rules, investments have been shifting away from prime funds towards government funds since late 2015. Since late June, this has resulted in nearly $250 billion in outflows from prime funds and more than $300 billion in inflows into government funds (Graph 10, left-hand panel). This has created incipient funding tensions for non-US, especially Japanese, banks which rely heavily on prime funds for their US dollar funding. In turn, these developments have created additional funding demand in the dollar/yen cross-currency swap market, widening pre-existing anomalies in the basis (Graph 10, right-hand panel).
Here she comes the Volatility "our best friend" Traders!!! Focus you on what you learn, do not forget ever what is your goal, breath with out fear and oxygenates well. ;)
Good trades Traders.