SNWAM watches the global markets for signs of dislocation and stress that thatmay impact the U.S. markets. Last week we witnessed a dramatic spike in China’s short-term interest rate SHIBOR. China’s SHIBOR is the equivalent of LIBOR, which is the world’s leading benchmark of short-term interest rates. With that background in mind, the rise in SHIBOR is important because it indicates tighter credit conditions in China’s short-term lending markets and further highlights China’s central bank tightening monetary policy. The higher rates are squeezing small and medium size banks in China that rely on short-term lending for financing daily operations and, given that at least one smaller regional bank has already defaulted on an interbank loan, it is possible a large Chinese financial institution could fail. Fortunately, the stress in short-term markets is being watched very closely by the People’s Bank of China (China’s equivalent of the Federal Reserve). Many market watchers believe tighter monetary conditions will cause deleveraging and rebalancing, and will move the Chinese economy toward a more sustainable, less credit-driven economy. The People’s Bank of China will likely stabilize SHIBOR in the near term, yet the higher rates send a strong message to the market that easy credit conditions are coming to an end. The impact on U.S. markets may be relatively benign, given that approximately 70% of U.S. GDP growth is driven by domestic consumer spending. Nonetheless, as we saw during the last five years, credit events in one market can have secondary and tertiary implications. We will continue to watch events in China and adjust our portfolios to mitigate the risk exposure to overseas events.