Safe as banks?

Safe as banks?

Key data to move markets this week

EUROPE 

Thursday: ECB Economic Bulletin, Eurozone Consumer Confidence and Business Climate surveys, and German Harmonised Index of Consumer Prices.
Friday: German Retail sales, German unemployment change, German unemployment rate, Eurozone Harmonised Index of Consumer Prices, Eurozone Core Harmonised Index of Consumer Prices, and Eurozone unemployment rate. 
Monday: Spanish S&P Global Manufacturing PMI, German S&P Global/BME Manufacturing PMI, and Eurozone S&P Global Manufacturing PMI.
Tuesday: Eurozone PPI.
Wednesday: German S&P Global/BME Composite and Services PMIs, Eurozone S&P Global Composite and Services PMIs. 

UK

Friday: GDP
Monday:
 S&P Global/CIPS Manufacturing PMI. 
Wednesday:
 S&P Global/CIPS Composite and Services PMIs.

US

Thursday: GDP, Core personal consumption expenditures, Personal Consumption Expenditure Prices, Initial jobless claims, and Continuing jobless claims.
Friday: Core Personal Consumption Expenditure Price Index, Personal Spending, Personal Income, Chicago Purchasing Managers’ Index, Michigan Consumer Sentiment Index, UoM 5 - year Consumer Inflation Expectations, and speeches by Fed Bank of New York President John Williams and Board of Governors member Lisa Cook.
Monday: S&P Global Manufacturing PMI, ISM Manufacturing Employment Index, ISM Manufacturing New Orders Index, ISM Manufacturing PMI, and ISM Manufacturing Prices Paid.
Tuesday: Factory Orders and JOLTS job openings. 
Wednesday: ADP Employment change, S&P Global Composite and Services PMIs, ISM Services Employment Index, ISM Services New Orders Index, and ISM Services PMI.
Thursday: Initial and continuing jobless claims. 

US Stock Indices 

Nasdaq 100 +6.62% MTD and +17.36% QTD
Dow Jones Industrial Average -0.80% MTD and -2.27% QTD 
NYSE -1.98% MTD and -0.40% QTD 
S&P 500 +0.03% MTD and +3.43% QTD

The tech-heavy Nasdaq 100 entered a bull market on Wednesday after trading up more than 20% from its 28 December closing low. Technology stocks have managed to outperform so far this year on growing expectations that the Fed will stop raising rates sooner than expected earlier in the year due to the tightening in market conditions caused by recent bank stresses. Investors have also been turning to the sector as a safe-haven after the financials sector was hit by the collapse of SVB, Signature and the fire sale of Credit Suisse. 

Mega caps had a mixed week with AmazonAppleMicrosoftMeta Platforms and Tesla all slightly up on the week. Alphabet was down for the week. 

According to Reuters, Alphabet's Google Cloud has accused Microsoft of anti-competitive cloud computing practices and criticised imminent deals with several European cloud vendors, saying these do not solve broader concerns about its licensing terms. Vice President Amit Zavery is reported to have said that individual deals struck with several smaller European cloud vendors only benefit Microsoft and that "They're selectively kind of buying out those who complain and not make those terms available to everyone. So that definitely makes it an unfair advantage to Microsoft and ties the people who complained back to Microsoft anyway."

Energy stocks were up this week as oil prices recovered due to a drop in US crude stockpiles, and a halt in exports from Iraq's Kurdistan region. Energy FuelsApa Corp (US)ShellChevronMarathon Oil CorporationHalliburtonCoterra Energy, and Exxon Mobil Corporation were all up.

Materials and Mining stocks were generally positive this week with Sibanye StillwaterNewmont MiningDow ChemicalMosaicPackaging Corporation of AmericaEcolab Inc.Freeport-McMoranCF Industries Holdings, and Albemarle Corporation all up while Yara International was very slightly down.

European Stock Indices

Stoxx 600 -2.36% MTD and +5.96% QTD 
DAX -0.24% MTD and +10.09% QTD 
CAC 40 -1.11% MTD and +11.02% QTD 
IBEX 35 -3.45% MTD and +10.23% QTD 
FTSE MIB -2.69% MTD and +12.79% QTD
FTSE 100 -3.96% MTD and +1.51% QTD 

European shares saw a bit of a recovery this week due in part to a rise in bank shares after UBS said it would rehire Sergio Ermotti to as chief executive to lead following its takeover of Credit Suisse.

Other Global Stock Indices 

MSCI World Index -0.24% MTD and +3.65% QTD
Hang Seng +2.05% MTD and +2.08% QTD

Fixed Income

US 10-year Treasuries at 3.57%.
German 10-year Bunds at 2.33%.
UK 10-year Gilts at 3.47%.

US two-year yields have risen by a full 50 basis points from Friday's six-month lows, reflecting greater investor confidence after the Fed, the Treasury and the FDIC have insisted that US banks are safe with measures in place to help ensure bank liquidity and the deal the FDIC agreed with First Citizens Bank to purchase $72 billion dollars worth of assets from SVB, while also handling $56 billion of the failed bank's deposits.

Commodities

Gold futures to $1,966.90 an ounce.
Silver futures to $23.37 per ounce.
West Texas Intermediate crude futures to $72.97 a barrel.
Brent crude futures to $78.28 a barrel.

Oil was up for most of the week on concerns over disrupted shipments from a key port in Turkey and smaller than expected US crude supplies. However, growth was limited due to worries that US fuel demand may be falling as the risks of a US slowdown have risen due to expected credit tightening caused by an overreaction to the collapse of SVB. Resilient Russian output has also influenced prices. 

Currencies

The USD came under pressure this week on concerns that the Fed may pause rate hikes sooner than expected due to the tightening in credit markets caused by the collapse of SVB and Signature. The GBP is +1.76% YTD against the USD and the EUR is +1.33% YTD. The British pound hit its highest level against the dollar in eight weeks on Wednesday as worries about the state of the global financial system continued to recede.

Bitcoin +22.53% MTD and +71.25% YTD.
Ethereum +12.30% MTD and +50.55% YTD.

Bitcoin recovered in the latter part of the week after reaching a10-day low on Monday. This was due to Binance Holdings Ltd. being sued by the US Commodity Futures Trading Commission (CFTC) for allegedly breaking trading and derivatives rules.

Note: As of 5:00 pm EST 29 March 2023 

Global Macro Updates

How the Fed got it wrong. To many observers the cause of the collapse of SVB and Signature Bank was because approximately 90% of their deposits were uninsured and that both banks had invested heavily in long-term bonds. The market value of these bonds fell as interest rates rose. When SVB had to sell some of these bonds to raise funds, the unrealised losses within its bond portfolio were made clear. The overdependence by some banks on long maturity Treasuries to generate a profitable “carry”: an interest-rate spread that provided yields above what the banks had to pay on deposits, backfired. As noted by Raghuram Rajan and Viral Acharya, ordinarily, this would not be so risky as long-term interest rates had not moved much for a long time and even if they did start to rise, depositors tend to be complacent and generally are slow to act, even when market interest rates move up. Treasuries were always liable to lose their immediate resale value if rates took off.

But there was another complicating factor: banks below a certain size threshold, primarily regional and smaller banks, were not required to meet the same stringent stress tests requirements in terms of capital adequacy or liquidity ratios. This slack in supervision began apparent during the testimony to Congress by Michael Barr, Fed Vice Chair for Supervision. Neither Barr, Martin Gruenberg, head of the Federal Deposit Insurance Corp (FDIC), and Treasury undersecretary for domestic finance Nellie Liang were able to justify why they, as regulators, did not act more forcefully against banks they knew to have issues. According to Reuters, Barr on Tuesday criticised SVB for going months without a chief risk officer and for how it modelled interest rate risk. Both the Fed and FDIC are expected to produce reports on the failure of SVB by 1 May. The Fed's report will concentrate on supervision and regulation, while the FDIC report will centre around deposit insurance. However, mindful of the impact that changes in the regime will have on smaller banks, it seems that the FDIC is, according to Bloomberg, coming under pressure from lawmakers to exempt community, regional and smaller banks from the special fee it’s preparing to charge US lenders to account for its rescue of uninsured depositors at SVB and Signature. The cost to the FDIC will be an estimated $20 billion from the demise of Silicon Valley Bank, and $2.5 billion from the collapse of Signature Bank, according to the agency.

The ECB’s sticky situation. The European Central Bank will likely continue to raise rates if financial stress is resolved. According to Bloomberg, Chief Economist Philip Lane said in an interview with the Zeit weekly newspaper that “If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up. However, if the financial stress we talked about becomes stronger, then we’ll have to see what’s appropriate.” The main problem for the ECB is that core inflation, particularly stemming from the services sector, remains uncomfortably high. Even though headline inflation is falling, e.g. Spanish March headline inflation came in at 3.1%, significantly down from February’s 6%, core inflation was only down to 7.5%, a problem, according to ECB Board member and head of the ECB's market operations, Isabel Schnabel, for the entire Eurozone. On Wednesday in a speech at the National Association for Business Economics conference, she noted that underlying inflation in the euro zone is proving sticky and the recent fall in energy costs may not pull it down as fast as some expect. She observed that overall inflation in the Eurozone is falling quickly but core prices, which exclude volatile fuel and food costs, is still rising, suggesting rapid price growth could prove durable and difficult to break. She referred to last year’s energy price spike and its immediate impact on the economy when she said, "My suspicion is that it is not the case, that it may not drop out as quickly as it moves in… and it's not even clear whether it's going to be completely symmetric in the sense that everything is even going to drop out at all.” Slovakia’s Central bank Governor and ECB Governing Council member Peter Kazimir said on Wednesday, "I personally think that if we do not significantly veer from the baseline scenario, we should not let up, that means we should continue raising interest rates, maybe at a slower pace, but we should continue."

The BoE’s warning call. As noted by the Financial Times, the Bank of England’s quarterly financial stability update from the Financial Policy Committee (FPC) was released on Wednesday and it provided a direct warning to pension funds that it needs to prepare for potential bond turmoil now if it is to avoid possible collapse. The FPC urged pension funds to permanently hold liquidity to deal with future instability. It concluded that the UK banking sector “remains resilient” and the outlook for household indebtedness was better than expected, while warning of potential issues in global private credit markets. It also reiterated the need for “urgent action” to address risks in financial institutions beyond the perimeter of traditional banking.

On Tuesday BoE Governor Andrew Bailey said the bank was on alert over the turmoil in the banking sector, but that Britain was not experiencing stress linked to the problems at SVB and Credit Suisse. 

Binance under the microscope. According to the Financial Times, Binance Chief executive Changpeng Zhao and others holding senior positions repeatedly instructed Binance employees to hide the company’s Chinese presence. This included an office in use until at least the end of 2019, and one Chinese bank that was used to pay some employee salaries. This is important as Binance’s American affiliate, Binance.US, is being scrutinised by the Committee on Foreign Investment in the United States (Cfius), a government agency that determines if overseas investments present national security risks, over its proposed $1 bn purchase of bankrupt crypto lender Voyager Digital’s $1 bn of assets. The accusation of closer ties with China than previously admitted to comes after Binance was sued on Monday by the CFTC for intentionally evading US laws including failing to register in the country and allowing Americans to trade crypto derivatives which are barred from retail investors, by VPNs. The company says it has no formal headquarters and does not serve US customers. The CFTC, which regulates US derivatives trading, said the company and its CEO, Changpeng Zhao, “instructed its employees and customers to circumvent compliance controls in order to maximise corporate profits.” The CFTC suit also alleges that the platform hasn’t done enough to combat money laundering and other crimes that it could be used for. Zhao responded by calling the lawsuit an “incomplete recitation of facts.” According to Reuters, investors who use the platform have pulled out $1.6 bn out of Binance. And, according to CNN, if the CFTC lawsuit is successful, it could result in “hundreds of millions” in fines as well as a possible ban on Binance’s ability to register as a derivatives trader in the US.

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