"Taking away quantitative easing tightened the Fed Funds rate by 300 basis points. No wonder the stock market is selling off."

Eoin Treacy's view

I had not previously seen the Wu-Xia estimate of rates in the shadow banking sector but it’s a useful indicator of a difficult to quantify sector and I have added it to the Chart Library. For anyone who is interested here is a link to the research paper detailing how it is constructed. 

The shadow banking sector is by its nature opaque so it is illuminating to see how much conditions have tightened as a result of the Fed’s decision to stop printing $80 billion a month. This has obviously had an impact on the size of the positions leveraged traders can tolerate. The question is how much more it can contract when the spread relative to the Fed Funds Rate has almost closed already. A move beyond 1% would likely signal stress in the financial sector beyond what is already evident. 

The above slides also highlight the deterioration of the MSCI Emerging Markets Index which is heavily weighted by China, South Korea, Taiwan and South Africa. As a result the majority of shares in the Index should be net beneficiaries of low oil prices. Certainly the chart is bearish, albeit oversold in the short-term but a decline to the 2008 lows would require a significant additional deterioration from what is already evident.