Week ended March 17, 2023
This past week brought more turmoil specifically focused on the global banking sector, but some risk markets shrugged it off. So who should an investor trust?
NASDAQ and Bitcoin (risk-on), or
US Treasuries, the corporate bond market and gold (risk-off)?
It’s a tough call and markets seem torn, buoyed in the background by the expectation of central bank monetary policy moderation as the bank crisis deepens. Perhaps I am predictable, but I am in the camp of the latter – things just don’t smell right to me at the moment. You have to admit – the failure of two US banks and ongoing bank stress is adding some spice to markets, which had become rather boring until 10 days or so ago when this all started. Fragility in the banking sector is certainly going to contribute to a slower economy, which makes the job of central banks slightly easier in their quest to bring down inflation.
WHAT HAPPENED THIS WEEK?
Following the Fed’s decision late last Sunday to guarantee uninsured deposits at Silicon Valley Bank and Signature Bank, a group of other US banks – led by First Republic – and the oft-troubled Credit Suisse moved into the spotlight. First Republic Bank has been under intense pressure since the FDIC took over Silicon Valley Bank 10 days ago. However, with the “persuasion” of the US Treasury a group of
11 of the largest US banks stumped up $30 billion of 120-day deposits that were injected into First Republic, providing much-needed liquidity to give the bank time to sort itself out. Equity investors didn’t buy it though, as the shares slumped another 33% on Friday, and are now worth less than one-fifth of what they were on March 1st.
In Europe, Credit Suisse was under the microscope as their bonds plummeted sharply across their entire debt complex, which is significant. This is a bank that has slipped on more banana skins over the years than you can shake a stick at, and it needs to be sorted whilst there is still time. The Swiss National Bank
provided a ChF 50 billion (US$54 billion) liquidity facility to CS on Thursday, but – like First Republic – it seemed to matter little as the bonds and shares continued to head south. The share migration over the last two years isn’t pretty. Unlike SVB which fell off a cliff, CS shares have been a slow burn in the wrong direction for some time now. As bad as the shares have performed, the bonds of CS have plummeted even more albeit more recently. Levels I saw on Thursday (second hand, no access to actual pricing) had senior holdco debt in 70-80 context and LT2 in the 60-70 context. AT1s must be getting battered too. I see a break-up here as the best solution, but who knows for sure what is happening behind the scenes. Until something is sorted with CS and several fragile US mid-sized banks, a cloud will continue to hang over risk markets.
Or so you might think. However, as I wrote at the beginning of this update, some segments of risk markets remain on fire in spite of the turmoil in the bank market. The NASDAQ surged 4.4% this week. Putting the NASDAQ to shame, Bitcoin was up an astonishing 36% for the week. US Treasuries also rallied hard, now beating returns on the S&P 500 YtD. Oh how investors love the higher probability now of a Fed pause, a lower terminal rate and a faster pivot!
Away from the banks in other news that mattered:
CPI came in above expectations, whilst PPI and retail sales suggested a slowing US economy.
The ECB did as expected – which I think is the right thing – and made good on their promise to raise the overnight bank rates by 50bps.
Chancellor Jeremy Hunt delivered the UK budget, and to the market’s surprise said that the UK would somehow avoid a recession.
This week, the Bank of England and Federal Reserve will be in action with monetary decisions, which will be interesting given the mixed economic data and failures of SIVB and Signature Bank (as First Republic hangs on by a thread). Chairman Powell had “guided” investors to expect a possible 50bps increase in the Federal Funds rate at this week’s FOMC meeting, but the bank stress has backed this down to 25bps which is the consensus going into the week. Having said that, the sharp decline in yields at the shorter end of the UST curve suggests that the Fed might not increase rates at all, which would be an interesting scenario. A similar increase of 25bps in the Bank Rate this week from the BoE is being debated by traders with odds apparently split 50/50 between no increase and a 25bps increase.
The NASDAQ has been leading the charge most of the year, recovering from its awful performance in 2022. Even in a week fraught with risk-off signals, the tech-heavy index still managed to gain 2.3% this week, bringing its YtD gain to a solid 12%. It has not been all joy though this year in US equities, with the large cap DJIA down YtD, and the small cap Russell 2000 barely positive.
In Europe, stocks slumped this week, with the FTSE 100 being the hardest hit, down 5.3% this week and now negative for the year. As US and European markets have been under pressure, Chinese equities have remained steady and are now the best performing market YtD of the international equity indices tracked by EMC.
Yields slumped across the UST maturity curve this week, most perversely at the short end as traders adjust their expectations for future Fed Fund rate increases. The 2y UST was down 71bps WoW. The 2y-10y yield curve, which widened to -90bps Friday before last, narrowed sharply this week to close at -42bps. Total returns on USTs this year are positive, outperforming the S&P500 YtD.
Although the US equities were mixed this week (aside from the NASDAQ), credit markets were telling a different story. It is not unusual for credit spreads to widen when underlying UST yields are falling, because spreads can be “stickier” than yields. Even so, corporate credit spreads were sharply wider on the week, with spreads on the US investment grade bond index widening 35bps and the US high yield index widening 66bps. Credit spreads in European high yield were also sharply wider, +98bps WoW.
Along with the rally in US Treasuries, gold also signalled demand for risk-off assets. Gold closed the week at $1,982/oz, its highest level since August 2020.
The price of WTI crude oil slumped further this week, bringing its decline to over 17% this year.
Bitcoin rallied hard this week. Some would say it is because banks and fiat currencies are being exposed for massive manipulation that takes place via central banks. Other would say it is because Bitcoin is a safe haven asset (rather than a risk-on asset). To be honest, I have no idea, and can only say that it is a good week – and in fact has been a good year – to own Bitcoin.
Scroll below ("The Tables") to see the updated tables for the week.
WHAT’S COMING THAT MATTERS
Economic data: The focus this week will be squarely on monetary policy decisions by the Bank of England and the Federal Reserve. Economic data will be sprinkled in, with some important data worth monitoring including Feb CPI (Weds) and retail sales (Fri) for the UK, Feb CPI for Japan (Thurs), preliminary PMI data for March for the Eurozone and US (Friday). There are also some consumer sentiment reads to be released.
Upcoming central bank monetary policy meetings:
Federal Reserve – Mar 21st-22nd (this week) and May 2nd-3rd
Bank of England – Mar 23rd (this week) and May 11th
Bank of Japan – Apr 27th-28th and June 15th-16th
ECB – May 4th and June 15th
Corporate bonds (credit)
Safe haven and other assets