Analysts at ANZ explained that a weak session for risk on Friday (despite what was another reasonable labour market report in the US) extended overnight, with equity markets tumbling, bonds surging on safe-haven demand and – probably most worrying for a debtor nation like New Zealand – many credit market metrics deteriorating sharply. What was the catalyst for this latest malaise? Key Quotes: "Well the same old concerns about global growth and emerging markets were evident. However, there were also rumours circulating that a large German bank would be unable to pay coupons on some of its riskiest debt securities." "Bloomberg also reports that the cost of insuring corporate bonds of European financials surged to the highest levels since 2013, therefore representing a shift in credit market worries well-beyond just highly indebted energy-related companies." "Credit market developments are high on our list of things we are watching to assess the spill-over risk to New Zealand. The economy has shown resilience to date, but the cost of funding for Australasian banks has already been lifting, so these types of overnight developments are a little unnerving and relevant for the risk profile facing the OCR." "And in a remarkable turn, there was also increased market chatter overnight that the Fed may ultimately have to join other central banks and adopt negative rates. That seems a little far-fetched right-here-and now. But it certainly means that Yellen’s testimony on Thursday NZT will require all her knowledge and guile. "She has to come across as optimistic without being too hawkish and cautious without being negative. Hawkishness or dovishness could easily exacerbate the current market sell-off, tightening financial conditions further." For more information, read our latest forex news.