Brace yourself for more volatility!
Brace yourself for more volatility!
Cracks are already showing in the banks
While the market is still reeling from the torrid moves of the last few days, we will have to deal with the US inflation data release (CPI) later today. Since the news of a bank run on Silicon Valley Bank broke, the 2-year US bond yield has dropped from a high of 5.09% to a low of 3.95% in 3 (yes, 3!) trading sessions. It is now currently at 4.09%, still a long way from the highs of last week after the hawkish comments made by the US Federal Reserve Chair Powell before the Senate Banking Committee, before news of troubles at the tech-focused bank, SVB, hit the wires.
At that time, the market was pricing for a 50/50 chance that the Fed will hike policy interest rates by 0.50% in their meeting next week but now, the probability of a lesser 0.25% hike is less than 80%. The Fed has said that it is still worried about inflation and the current turmoil in the banking sector is going to make its job a lot more complicated.
Cracks are already showing in the banks who believed the Fed a year and a half ago when it said that it would keep interest rates low for a long time before it decided to abandon that promise because inflation was suddenly not “transitory”. Should the inflation print surprise to the upside later today, there will be more pain for the markets as the already fragile risk sentiment will be challenged further.
The dilemma for the Fed now is if they should follow through with their promise to keep inflation under control (based on evolving data) or allow more time for the lagged effects of their previous spree of aggressive interest rate hikes to show before acting further. A benign inflation data point will allow them more freedom to be patient and a high inflation print is going to cause more volatility and jitters in the market.
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Day Ahead
The US Consumer Price Index is expected to show a 6% rise in prices Year-on-Year, a slight decrease from the previous print of 6.4%. The core index is expected to show a rise of 5.5% YoY (vs 5.6% prev).
Trading Plan
1. Currencies:
CNH - Bullish. USDCNH is coming off as risk sentiment improves. Still short USD/CNH.
2. Commodities:
Uranium & Energy - Stay patient and stay invested.
3. Stocks:
US Stock Index: The stock market was very volatile in yesterday’s session as markets tried to deal with the aftermath of the US authorities efforts to calm the markets in light of the recent bank failures. The US financial sector continues to weigh on risk sentiment.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The Consumer Price Index today will weigh on risk sentiment should it come in higher than expected as it means that the Federal Reserve is in a tight spot.
What Happened Yesterday
The US Treasury Yield curve inversion continues to narrow as investors rush to find refuge in the safety of bonds. The 2-year bond yield is now higher than the 10-year by a mere 0.48% (compared to 0.90% last Friday). The 2-year bond yield plummeted -0.57% to 4.03% while the 10-year slid -0.15% to 3.55%.
The US stock futures saw a volatile session yesterday with S&P 500 rallying +1.30% through the Asian hours as the Federal Reserve and US Treasury announced measures to save the US financial sector. It then fell -3.32% from the highs as investors fled to safe havens such as bonds and gold.
The US stock market opened lower from the previous day (the S&P 500 opened -0.69% higher) but tried to go higher in the early New York session. However, the underperformance in bank stocks weighed on risk sentiment and brought the market lower through the day. As a result, S&P 500 fell -0.15% on the day (intraday high: +1.13%, intraday low: -1.37%) while the Dow Jones Index slipped -0.28% (intraday high: +1.04%, intraday low: -0.89%). The Nasdaq managed to rise +0.79% (intraday high: +2.06%, intraday low: -1.14%) due to the assurance that the deposits at SVB (which many tech companies bank with) are guaranteed by the Federal Reserve and US Treasury.
Bitcoin and Ether remains the poster child of safe havens in the crypto space as investors flock to them amidst the risk aversion. Bitcoin leapt +9.7% while Ether rose +5.9%.
Headlines & Market Impact
Biden pledges 'whatever needed' for U.S. bank system as SVB meltdown roils markets
Notable Snippet: Bank stocks around the world plunged on Monday even as President Joe Biden vowed to take action to ensure the safety of the U.S. banking system after the sudden collapse of Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O).
Biden's efforts to reassure markets and depositors came after emergency U.S. measures to shore up banks by giving them access to additional funding failed to dispel investor worries about potential contagion to other lenders worldwide.
The White House said the Treasury Department is working with regulators on the next steps.
With investors fearing additional failures, major U.S. banks lost around $90 billion in stock market value on Monday, bringing their loss over the past three trading sessions to nearly $190 billion.
What we think: We should see more measures in place to save the economy as the policymakers should know the far-ranging risks that are present.
First Republic drops 60%, leads decline in bank stocks despite government’s backstop of SVB
Notable Snippet: First Republic Bank led a decline in bank shares Monday that came even after regulators’ extraordinary actions Sunday evening to backstop all depositors in failed Silicon Valley Bank and Signature Bank and offer additional funding to other troubled institutions.
San Francisco’s First Republic shares lost 61.8% on Monday after declining 33% last week. PacWest Bancorp dropped 45%, and Western Alliance Bancorp lost more than 47% as regional bank stocks fell sharply. Zions Bancorporation shed about 26%, while KeyCorp fell 27%. Other financial firms were also under pressure, as Bank of America slipped 5.8%, while Charles Schwab tumbled more than 11%.
The declines came despite Sunday’s news that the Federal Reserve created a new Bank Term Funding Program that will offer loans for up to a year to banks in return for high-quality collateral like Treasurys. The central bank also eased conditions at its discount window.
What we think: Smaller banks remain susceptible to the contagion effects of SVB’s failure and the risks of bank runs will continue. The Federal Reserve will have to tread very carefully in their policy meeting next week given that the economy remains at risk of breaking.
In his first address, China’s new premier says ‘high quality’ growth is a priority
Notable Snippet: China’s new premier Li Qiang said Monday that policymakers would focus on the quality of growth — with special attention to ordinary people’s need for housing, income, education and health care.
His comments reflected how Beijing is still focused on priorities other than growth itself.
“Most people do not keep their eye on GDP growth all the time,” Li said in Mandarin, according to an official translation. “What they care more about are things that happen in their everyday life.”
“Currently our development is focused on providing for people’s basic needs,” he said. “Going forward, the focus will be shifted toward delivering a life of better quality for the people.”
“On progress, the key will be making progress on high-quality development,“ Li said. He said policymakers would work toward stability in prices and employment.
What we think: The government’s commitment to boost the economy is clear. Expect more pro-growth policies in the weeks ahead.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord