Liquidity Monitor. 1 August Amy Auster Katie Dean Amber Rabinov Jasmine Robinson Economics & Markets Research

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1 Liquidity Monitor 1 August 20 Amy Auster Katie Dean Amber Rabinov Jasmine Robinson Economics & Markets Research

2 The Fed remains committed to shoring up liquidity in the market Daily summary of US Federal Reserve Open Market Operations + US$ bn Fed liquidity injections Jan - US$194 bn Feb - US$256 bn Mar - US$201 bn Apr - US$383 bn May - US$322 bn Jun US$347 bn Jul US$353 bn -10 Jul- Oct- Jan- Apr- Jul- +: US Temporary Cash Added/Drained To/From Banking System by the US Federal Reserve Auctions December 20 January 20 February 20 March 20 April 20 May 20 June 20 July 20 TOTAL Term Auction Facility Average stop out rate % Total Amount (US$ bn) Term Securities Lending Facility Auctions March 20 April 20 May 20 June 20 July 20 TOTAL Total Amount Lent (US$ bn) Sources: Bloomberg, US Federal Reserve, ANZ Economics & Markets Research

3 The Effective Fed funds rate continues to trade close to the policy rate % Federal funds effective rate vs Fed funds and Fed discount rate* Primary credit discount rate Federal funds rate Effective Fed funds rate 1.5 Jan- Apr- Jul- Oct- Jan- Apr- Jul- *Effective rate is the volume-weighted average rate that the Fed funds trades through major brokers, as against the Fed policy rate

4 The US Treasury 2s10s yield curve has continued to steepen 4 US Treasury yield curve US Treasury 2s10s curve 5.0 % 10-Sep 10-Jan 15-Nov 27-Mar 220 bps Jun 31-Jul m 6m 2y 5y 10y 30y Jan- Apr- Jul- Oct- Jan- Apr- Jul-

5 The US$ LIBOR spread was unmoved by the Fed s latest action % 3-month US$ LIBOR versus Fed funds rate month US$ LIBOR Fed funds rate 1.0 Jan- Jul- Jan- Jul-

6 6 Volumes of commercial paper continued to stagnate Outstanding volume of commercial paper fell by US$24.5 bn in July while asset-backed commercial paper was down US$4.5 bn 2,500 US$ bn 2,300 Commercial paper 2,100 1,900 1,700 1,500 1,300 Asset-backed commercial paper 1, Jan-06 Jul-06 Jan- Jul- Jan- Jul- Source: US Federal Reserve and

7 7 Losses by financial institutions hit US$480 bn as at July The largest losses have been felt primarily by US-based banks Citigroup Merrill Lynch UBS Wachovia Bank of America HSBC IKB Deutsche Royal Bank of Scotland Washington Mutual Morgan Stanley JPMorgan Chase Deutsche Bank Wells Fargo Credit Suisse Credit Agricole Lehman Brothers HBOS Fortis Bayerische Landesbank Canadian Imperial (CIBC) Barc lays Societe Generale ING Groep Mizuho Financial Group WestLB Indymac Bancorp Inc. Asset write-downs and credit losses amount to US$480.3 bn US$ bn

8 8 but capital injections totalled US$355 bn US-based banks have lead the fundraising charge Citigroup Merrill Lynch UBS Royal Bank of Scotland Bank of America Barc lays Lehman Brothers IKB Deutsche Washington Mutual Wachovia Societe Generale Credit Agricole National City WestLB HBOS JPMorgan Chase Sumitomo Fortis Morgan Stanley ING Groep Wells Fargo HSBC Deutsche Bank Canadian Imperial Credit Suisse Capital injections since July 20 amount to US$355 bn US$ bn

9 9 Over 100,000 jobs are estimated to have been lost since the beginning of the credit crunch Citigroup Bank of America Bear Stearns Wachovia UBS Lehman Brothers Merrill Lynch Morgan Stanley Washington Mutual JPMorgan Chase Indymac Bancorp Inc. HSBC Credit Suisse WestLB Goldman Sachs National City Barc lays KeyCorp Royal Bank of Scotland Fortis Wells Fargo Deutsche Bank Nomura Holdings Job losses at the world s biggest banks and security firms exceed 100,025 since July 20 Positions cut 0 4,000 8,000 12,000 16,000

10 We re well into a bear market with equity markets only staging a mild recovery towards the end of July 10 The US Dow Jones rose 0.25% since the end of June, while the S&P Asia* Index fell 1.8%, Australia s ASX 200 was down 4.6% and Japan s Nikkei is 0.8% lower 170 Index Jan 2006 = S&P Asia* 140 Australia US Japan 70 Jan- Apr- Jul- Oct- Jan- Apr- Jul- *S&P Asia combines market performance of Hong Kong, Korea, Taiwan and Singapore

11 US financial stocks recovered from mid-month lows, supported by Fed action to shore-up liquidity, Fannie & Freddie rescue and further announcements of write-downs 11 S&P 500 Investment Banking and Brokerage Index 250 Index Jan- Apr- Jul- Oct- Jan- Apr- Jul-

12 Similarly, CDS spreads tightened towards the end of the month following collective action to support the financial sector 12 Brokers Lenders 360 Basis points 360 Basis points Merrill Lynch Goldman Sachs Freddie Mac Citigroup Wachovia Jan- May- Sep- Jan- May- 0 Jan- May- Sep- Jan- May- Source: Bloomberg and ANZ Economics & Markets Research

13 CDS spreads for European banks and major US corporates also narrowed 13 European banks Major US corporates 160 Basis points 160 Basis points 120 HSBC Santander Commerzbank 120 Disney Union Pacific AT&T Corp IBM Kraft Foods Jan- Apr- Jul- Oct- Jan- Apr- Jul- 0 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Source: ANZ Economics & Markets Research and Bloomberg

14 14 In Australia, credit spreads narrowed itraxx Australia 5 year 220 Index Aggregate index Other non-financial corporates* 'Big four' banks* 0 Jan- Apr- Jul- Oct- Jan- Apr- Jul- *Senior debt Sources: ANZ Economics & Markets Research and Bloomberg

15 But volatility remained elevated, moving back to March 20 levels 15 VIX index 35 Index VIX index The VIX (Chicago Board Options Exchange SPX Volatility Index) measures US equity market volatility 0 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-

16 Short-term interbank spreads remained wide in July, rising in the US and Australia but easing in the Euro zone and UK Spread between 3-month interbank and 3-month OIS 1 rates Basis points 120 Basis points 100 US 100 UK Australia 40 Euro Jan- May- Sep- Jan- May- 0 Jan- May- Sep- Jan- May- 1 Overnight indexed swap rate, a measure of market expectations of official policy rates

17 17 Commodity prices pushed lower over July Freight costs have eased Copper prices are lower 14 Baltic Dry Index ('000) Jan- Apr- Aug- Nov- Mar- Jul- 9 US$'000/t Jan- Apr- Jul- Nov- Feb- Jun- Gold prices came off recent highs 1000 US$/oz Jan- Apr- Jul- Nov- Feb- Jun- Oil prices have fallen below US$125/bbl 150 US$/bbl Jan- Apr- Jul- Nov- Feb- Jun- Sources: Bloomberg, Standard and Poor s and ANZ Economics & Markets Research

18 18 supporting USD strength The USD picked up 86 Index Jan- Apr- Jul- Nov- Feb- Jun- propelling the AUD and NZD lower AUD/USD, NZD/USD Jan- Apr- AUD NZD Jul- Nov- Feb- Jun- as the EUR eased 1.6 EUR/USD AUD/EUR EUR/USD (LHS) AUD/EUR (RHS) 1.2 Jan- Apr- Jul- Nov- Feb- Jun Per USD Jan- Apr- and the JPY softened Jul- Nov- Feb- Jun-

19 19 July has not been kind to Australian equities 190 Index Jan 2006 = Materials Energy Performance over July S&P/ASX 200: -4.6% Consumer discretionary: -3.6% Finance: -1.8% Energy: -13.7% Materials: -10.3% S&P/ASX 200 Consumer discretionary Finance Jan- Apr- Jul- Oct- Jan- Apr- Jul-

20 Weaker economic data have increased market expectations of a medium-term rate cut 20 % chance of a 25bp rate hike in the next 3 months 200 % Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-

21 seeing the Australian 3s10s curve steepen into positive territory and shift downwards 21 Australian government yield curve 3s10s bond futures curve % 10-Sep 3-Apr 30-Jun 11-Jan 29-May 31-Jul 10 0 bps y 2y 3y 4y 5y 6y 8y 10y 15y -70 Jan- Apr- Jul- Oct- Jan- Apr- Jul-

22 In Australia, interbank rates have stabilised at around a 50bp premium to cash Australian 3-month bank bill versus RBA cash rate % month bank bill RBA cash rate Jan-06 Jul-06 Jan- Jul- Jan- Jul-

23 23 Funding pressures persist as swap spreads remain elevated Spread between swaps and government bonds 150 Basis points year 90 3-year Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul-

24 RBA exchange settlement account balanced eased back to average A$1.75 bn in July from A$1.91 bn in June A$mn Jan-06 Apr-06 Jul-06 Oct-06 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Sources: Reserve Bank of Australia and ANZ Economics & Markets Research

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