*When we dissect recent Eurozone money market developments, we still see the same old picture of a stable market: gradual and linear increases in money market spreads because of ongoing ECB QT and a large amount of bank reserves locked up at Euroclear;
*Yes, there has been a sudden spike in ECB marginal lending. But that’s an oddity and not a sign of a shortage of reserves in pockets of the Eurozone banking system. Excess reserves have decreased by almost fifty percent from the peak, but demand for ECB refinancing has remained low and stable. And with France having finally adopted its austerity-lite budget, we do not need to worry about France for a while;
*The euro has richened in the basis and now commands a premium over the dollar. That reflects divergent money market developments. In the US bank reserves are slowly increasing because of the Fed’s bill purchases, which has anchored US money market rates. Excess reserves in the Euro Area continue to fall at a relatively brisk pace – meaning that money spreads will tighten further;
*In the greater scheme of things, an unconstrained President Trump will likely shrink US net capital inflows (‘sell America’, ‘quiet quitting’ of US assets). That, and increased demand to hedge dollar exposure, could explain the basis having flipped from a dollar premium to a euro premium.

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