The Fed to the rescue!
Expect volatility to remain high for now as the market awaits the US inflation (CPI) data release tomorrow.
Markets were hanging in the balance, and it was a harrowing weekend for many tech companies which had their money stuck in the Silicon Valley Bank (SVB). It was unclear if they would be able to access their money beyond the $250,000 that is guaranteed by the Federal Deposit Insurance Corporation (FDIC) in event of a bank failure.
However, prior to market opening hours in Asia, the US authorities announced a rescue package to stem the panic – guaranteeing all deposits above the $250k limit and creating a loan facility for banks which are in need of cash to pay for withdrawals. The loan facility allows banks to use the bonds they hold that are underwater to borrow the full face value of the bond. For example, if Bank A bought a bunch of bonds at $100 and the bonds now are worth $70 because of interest rate rises, Bank A can use that $70 worth of bonds to borrow $100 from the Fed. Sweet deal, eh?
For now, the contagion has stemmed, and the panic will subside. It sucks, though, for SVB and Signature Bank as the deal came after they had imploded and it is little consolation for their shareholders that their implosion pushed the Fed to save the other banks that were in similar situations.
With this market turmoil and with uncertainty remaining high, the risk of the Fed hiking interest rates aggressively in their March meeting has subsided. Expect volatility to remain high for now as the market awaits the US inflation (CPI) data release tomorrow.
Trading Tip
It's all about the Trading Process
When trading, sometimes we find ourselves becoming lax in the way we approach our trades. This could be because we are getting too complacent as our trades start to perform or if our trades seem to be going nowhere or even against us. Nevertheless, becoming too laxed in our trading will eventually work against our profitability.
Being disciplined in trading is imperative as it is something that we can fall back on once things do not make sense in the markets (in fact, that is really common.) It allows us to exit our trades at appropriate levels and ensure that we do not get carried away by our emotions by the seemingly “irrational moves” of markets.
Week Ahead
The US entered Daylight Saving Time yesterday and the New York trading session will be moved forward by an hour.
Monday: -
Tuesday: 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).
Wednesday: The BoJ Monetary Policy Meeting Minutes will be released and market impact should be limited. The US Producer Price Index is expected to show that prices rose 5.4% Year-on-Year (vs 6.0% prev) while the core index is expected to rise 5.2% YoY (vs 5.4% prev).
Thursday: The European Central Bank is expected to raise interest rates by 0.5%, bringing the prevailing interest rates to 3.5%. ECB President Lagarde’s stance on the future path of interest rates will be closely monitored in the press conference after.
Friday: European Consumer Price Index is expected to show a 8.5% increase in prices Year-on-Year, a tad lower than the previous print of 8.6%. The core index is expected to rise to 5.6% YoY from 5.3% last month.
Trading Plan
1. Currencies:
CNH - Bullish. USDCNH is coming off as risk sentiment improves. Still short USD/CNH.
Key resistance/support levels -
Resistance is at 7.01-7.02. Support is at 6.71-72
2. Commodities:
Uranium & Energy - Stay patient and stay invested.
3. Stocks:
US Stock Index: The stock market continues to trade weak as the financial and tech sector face troubles due to SVB’s closure on Friday. Volatility will remain high for now as regulators attempt to address the risks that the US economy is facing due to the high interest rates. The announcement prior to the Monday Asian open that the US authorities will guarantee all bank deposits beyond the $250k FDIC insured amount is boosting risk sentiment. Nasdaq future and the S&P 500 future are both up nearly 2% in the first few hours of the Asian trading session. .
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The contagion effect from SVB’s (Silicon Valley Bank) and Signature Bank’s closure will be limited now as the authorities have shown their strong resolve to stem the panic with guarantees and loans.
What Happened Yesterday
The US Nonfarm Payrolls (NFP) showed 311k jobs being added to the economy (vs 200k expected), down from 504k (revised from 517k) last month. Unemployment rate rose to 3.6% (expected 3.4%) from the previous print of 3.4% while the labour force participation rate rose to 62.5% from 62.4%. The labour market remains tight despite numbers being slightly worse than before. However, given the heightened risks present in the financial sector of the US economy due to SVB shutting down, aggressive interest rate hikes in March is highly unlikely.
The US Treasury Yield curve inversion narrowed as risks in the US banking industry continue to unravel following SVB’s closure. The 2-year bond yield is now higher than the 10-year by 0.90%. The 2-year bond yield slid -0.30% to 4.60% while the 10-year fell by -0.23% to 3.70%.
The US stock futures drifted lower during the first half of Asian hours (with S&P 500 futures falling -0.78% to 3924) before bouncing +1.37% from the lows to 3978 just before the release of the NFP data. The stronger than expected NFP print then sent markets lower with the S&P 500 falling -0.87%.
The US stock market opened slightly lower from the previous day (the S&P 500 opened -0.14% higher) and fell further upon the first hour of the New York trading session. It then fell further as Silicon Valley Bank was shut down and taken over by regulators. As a result, S&P 500 slid -1.45% on the day (intraday high: +0.40%, intraday low: -1.84%), the Dow Jones Index slipped -1.07% (intraday high: +0.52%, intraday low: -1.46%) while the Nasdaq dropped -1.38% (intraday high: +0.61%, intraday low: -1.72%).
Monday Morning in Asia Trading hours
Treasury Secretary Janet Yellen approved a resolution which fully protects all Silicon Valley Bank depositors and gives them access to all their money from Monday, 13 March, somewhat bailing out the tech firms that had their deposits with SVB. The US Federal Reserve and Treasury also announced the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The measure is done to save banks from the adverse effects of the interest rate hikes on the bank assets, allowing banks to meet the needs of their depositors.
Market reaction to this
Stocks futures rallied in early Asian hours with the S&P 500 and Nasdaq futures climbing more than +1.7%.
The USD weakened another -0.69% this morning.
The 2-year US bond yield opened -0.12% upon the release of the statement.
US investment bank, Goldman Sachs, revised its call for the US Fed March meeting from a hike of 0.25% to keeping interest rates unchanged.
The crypto market traded strongly over the weekend despite the weak risk sentiment in the US stock market and the risk the tech and crypto industry is facing. Bitcoin and Ether jumped +8.0% and +9.9% over the weekend respectively as fears that USDC (which had $3.3 billion of its reserves stuck in Silicon Valley Bank) would de-peg from $1. Frantic selling of USDC caused it to fall below $0.90 as traders dumped the stablecoin and fled to BTC and ETH for safety. USDC has since bounced to 0.99 because of the Fed’s announcement to support the banking sector.
Headlines & Market Impact
Regulators close crypto-focused Signature Bank, citing systemic risk
Notable Snippet: U.S. regulators on Sunday shut down New York-based Signature Bank, a big lender in the crypto industry, in a bid to prevent the spreading banking crisis.
“We are also announcing a similar systemic risk exception for Signature Bank, New York, which was closed today by its state chartering authority,” Treasury, Federal Reserve, and FDIC said in a joint statement Sunday evening.
The regulators shuttered Silicon Valley Bank on Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis — and the second-largest ever. The dramatic moves come just days after the tech-focused institution reported that it was struggling, triggering a run on the bank’s deposits.
Signature is one of the main banks to the cryptocurrency industry, the biggest one next to Silvergate, which announced its impending liquidation last week. It had a market value of $4.4 billion as of Friday after a 40% sell-off this year, according to FactSet.
What we think: Contagion risks remain in the US stock market, the financial sector and the tech sector will be hit hard for the time being. Widen your stops and be prepared for more volatility ahead. However, it is encouraging to see regulators step in quickly to address risks following the lessons they have learned in the 2008 banking crisis.
U.S. government steps in and says people with funds deposited at SVB will be able to access their money
Notable Snippet: Banking regulators devised a plan Sunday to backstop depositors with money at Silicon Valley Bank, a critical step in stemming a feared systemic panic brought on by the collapse of the tech-focused institution.
Depositors at both failed SVB and Signature Bank in New York, which was shuttered Sunday over similar systemic contagion fears, will have full access to their deposits as part of multiple moves that officials approved over the weekend. Signature had been a popular funding source for cryptocurrency companies.
Those with money at the bank will have full access starting Monday.
The Treasury Department designated both SVB and Signature as systemic risks, giving it authority to unwind both institutions in a way that it said “fully protects all depositors.” The FDIC’s deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits.
Along with that move, the Federal Reserve also said it is creating a new Bank Term Funding Program aimed at safeguarding institutions affected by the market instability of the SVB failure.
A joint statement from the various regulators involved said there would be no bailouts and no taxpayer costs associated with any of the new plans. Shareholders and some unsecured creditors will not be protected and will lose all of their investments.
What we think: The policymakers have stepped in quickly to save the depositors and this has led to the stock market futures rallying this morning. With policymakers on the lookout for more systemic risk in the economy, we should see them minimise any policies that will threaten the stability of the economy.
Stablecoin USDC breaks dollar peg after firm reveals it has $3.3 billion in SVB exposure
Notable Snippet: The U.S. cryptocurrency firm Circle’s USD Coin lost its dollar peg and fell to a record low Saturday morning after the company revealed it has nearly 8% of its $40 billion in reserves tied up at the collapsed lender Silicon Valley Bank.
USDC is known as a stablecoin, which means the value of the virtual currency is supposed to be pegged to a reference currency. USDC is designed to trade at $1, but it fell below 87 cents on Saturday, according to data from CoinDesk.
In a tweet Friday, Circle said it has $3.3 billion in remaining reserves at SVB. The company called for the continuity of the bank and said it will follow guidance from regulators.
The cryptocurrency industry is still picking up the pieces after the sudden collapse of FTX last year, and USDC’s break with the dollar could signal more trouble ahead. Stablecoins, like banks, are vulnerable to runs.
What we think: Bitcoin is starting to show its status as a safe haven in this time of crisis.
Sentiment
FX
Stock Indices
Best,
Phan Vee Leung
CIO & Founder, TrackRecord