Another key indicator on a bigger worldwide scale would be the LIBOR rate, which in the case of US - reflects a similar change.
The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. It is roughly comparable to the U.S. Federal funds rate.
Lower interest means cost of borrowing and risk is lower - an ideal plea for an increase in capital and liquidity. After all if it costs you $1 a year to borrow $100 (1% interest) versus $2 for $100 (2%), the expense to you the entrepreneur is much lower, giving you the incentive to create new ventures, right?
The cost of borrowing in dollars in London for three months fell for an eighth day, the longest run of declines since May, after the Federal Reserve made as much as US$540-billion available to mutual funds to resuscitate lending.
The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 29 basis points to 3.54%, the British Bankers' Association said. The overnight dollar rate slid to 1.12%, the lowest level since June 2004. The Libor-OIS spread, a measure of cash scarcity, fell below 250 basis points for the first time since Sept. 30.
Simply put, it's the rate that banks lend to each other. In Canada and US, it's also the rate that Central Bank (Federal Reserve) will provide liquidity capital to major banks in case of anything as extreme as run on the bank to just a normal daily money excess.
The overnight rate is generally the rate that large banks use to borrow and lend from one another on the interbank market. In some countries (for example, Canada), the overnight rate may be the rate targeted by thecentral bank to influence monetary policy. In most countries, the central bank is also a participant on the overnight lending market, and will lend or borrow money to some group of banks.
There may be a published overnight rate that represents an average of the rates at which banks lend to each other; certain types of overnight operations may be limited to qualified banks. The precise name of the overnight rate will vary from country to country.
Still, would the Fed really consider lowering interest rates below 1%? The last time rates were at 1% was between June 2003 and June 2004. Rate cuts have been a key tool the central bank has used in the past to boost a weak economy. A variety of lending rates, including credit cards and home equity lines, as well as the prime rate used to set many business loan rates, are pegged to the fed funds rate.
So lower rates usually lead to cheaper credit, thus spurring businesses and consumers to spend money more freely.
In the last few times rates were cut - market has rallied to a certain degree despite an overall grim market - no different this time. Unfortunately with rates now at 1%, we can only realistically expect 2 more cuts of 0.5%. A zero % interest rate should sink the savings rate in the US to an all time low - waking people up to the fact that it may not be worthwhile to keep all their hedge fund redemptions in US denomination as GIC rates lower accordingly.
The HFRI Fund Weighted Composite was down 5.4% in September as hedge funds experienced their worst month since the Russian debt crisis.
And the large drawdown is continuing in October, with the investible HFRX Global index down 9.0% to 24 October, according to absolute return funds provider Cazenove Capital Management.
Writing in the firm’s October listed hedge fund dispatch, Cazenove analyst Tom Skinner said:
“In face of collapsing NAVs, limited buybacks and heightened performance uncertainty, discounts in the listed sector have moved sharply wider. Several funds are now in danger of breaching discount control mechanism triggers.”
With many listed fund of hedge funds trading on discounts in excess of 20%, and serious concerns over their ability to support narrow discounts in the short to medium term, the sector is coming under great pressure, Skinner said.
“As the AUM of the wider hedge fund universe contracts, we believe that the listed sector will not be immune. Several funds, some possibly trying to pre-empt discount control mechanism triggers, are winding-up, offering exit opportunities or restructuring their funds, including F&C Event Driven, MW Tops, CMA Global, Close Man Hedge and Aida.
“Several more funds are on the ropes, including Gottex Market Neutral, Dexion Equity Alternative and Dexion Alpha, and we believe that many of the listed fund of hedge funds do not have the critical mass to withstand this period and that the universe will shrink."
One popular explainations for the USD$'s recent meteoric rise against other currencies is that Hedge fund redemptions in $USD means a higher demand for $USD in the marketplace as hedge funds clear their leveraged positions. The keyword here being leverage - selling equities as a loss (triple or more times) - and expecting to covert it to currency. Multiply this en masse and you have a net effect of a dramatic increase in demand for $USD.
Hope that brief overview of the interest rate situation is helpful - now let's take a look at what's new in our junior markets.
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Yamana ( AUY ), Lundin ( LUN.to ), Barrick ( ABX ), Kinross ( KGC), and a few more usual major producers all saw a drastic bump of 20%+ for the day as gold prices stabilized at $750/ounce and interest rate cuts around the globe reminded people of the pending inflation wave that is set to hit the world in the coming 6-12 months.
Upon filing the spectacular 43-101 resource estimate of 11 billion lbs of copper last Friday on SEDAR - Minera Andes has finally seen some optimism along with the major producers. Since dropping to $0.50 - MAI has recovered to a bit more respectable $0.65 yesterday. With pending Q3 results and another likely profitable quarter, MAI is a great solid buy. Lundin Group is another steal at $1 to $1.40.
Resource rich miner junior TNR Gold continues to see waves of anonymous selling in larger blocks of $10,000 - suggesting larger fund liquidation - likely from month end redemption period. The fundamentals of the company remains very solid. Key indicators to watch for next few months includes outcome of the Los Azules legal dispute - especially with 43-101 report attracting major interest across the globe. Salto and Tapau drill results may also contribute to a nice jump, it's currently at $0.05-0.07, bargain bin prices for a quality company / management.
With Zinc prices expected to jump back up despite Russia and China cutting GDP - another solid consideration for your investment dollars would be Canadian Zinc Metals. After a private placement at $0.90 a short 2 weeks ago, CZX.v slid down to $0.125 Monday. It has since then recovered to $0.20 range - and I think this is a very low risk entry point for another exploration junior with huge bluesky potential on a base metal that has potential for years to come.
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