Summary: Markets ended on a positive note on Friday and stability continued into Monday as the turmoil in US and European banks failed to new contagion into risk assets. It’s a quiet week ahead for earnings and for macro data, but the implications of the recent turmoil will take considerable time to sort through, especially the risk that tighter credit conditions slow economic growth. There has certainly been an enormous reset lower of forward central bank expectations.
S&P 500 futures are bouncing 0.6% Monday morning trading around the 4,023 level which is above the level before the Silicon Valley Bank went into distress signalling the strong market confidence. Equity investors seem to be putting a lot of positive weight on the falling bond yields, which of course is positive for valuations, but investors must ask themselves why bond yields are falling. Our interpretation is that they are falling because of hedging flows and corporate flows from deposits into short-term bonds. The new lower Fed Funds futures forward curve also reflects the market’s expectations that the recession probability is on the rise. The US leading indicators index is now below the levels from back in late 2019, before the pandemic, when the economy clearly was slowing down and potentially headed for a recession.
Hang Seng Index dropped as much as 2% in early trading before recovering to be down only around 0.6% as of writing. Alibaba (09988:xhkg) led the benchmark’s rally and rose 3% after the media reported that the eCommerce giant’s founder Jack Ma had returned to China and visited a school that he founded. Earlier there were reports suggesting that Ma was unwilling to heed calls from the Chinese Government to return to China. Meituan (03690:xhkg) which reported solid Q4 results, dropped more than 4% on analyst downgrades. In A-shares, CSI300 shed 0.5% as financials, real estate, insurance, education, and semi-conductor names retreated.
Stable risk sentiment saw the JPY backing off its attempt at breaking higher late last week, a disappointment for JPY bulls, given the tectonic shift in forward central bank expectations after the recent bank turmoil that has vastly reduced yield spreads between the rest of the world and still very low yielding Japan. The calendar roll for the Japanese financial year always deserves attention this time of year as the new year begins on April 1 and brings with it a new Bank of Japan leadership, as Kazuo Ueda is set to take over the reins after 10 years under Kuroda. Elsewhere, the US dollar attempted a comeback late last week but has yet to show its teeth and would probably need a new round of wobbly sentiment to do so. US macro data this week includes the March Consumer Confidence survey up tomorrow and Friday’s February PCE inflation data, though data will be discounted heavily until we get into the April numbers due to the recent turmoil in banks as we await how the impact on credit transmission affects the economy from here.
Crude oil remains challenged by the outlook for growth in the US and Europe where the liquidity and banking sector concerns remain the most elevated. Heavy selling this past few weeks has set the market on course for it steepest first-quarter drop since 2020 when the pandemic briefly wiped-out demand. Speculators have spent the past few weeks aggressively adjusting their positions to reflect the sudden price weakness following months of rangebound trading. The result being the smallest net long WTI since 2010 at 71.3k lots while the combined long including Brent has slumped to a three-year low. Developments that may slow further selling appetite while raising the prospect of a bounce once the technical and/or fundamental outlook starts to improve. For now, the ebb and flow of risk appetite remains the key driver with focus on banking sector developments and US economic data. Also focus on a halt in supplies on the Ceyhan pipeline to Turkey from Kurdish controlled Northern Iraq.
Gold traded lower on Friday on profit taking following three so far unsuccessful attempts to break above $2000. The softness has extended into Monday’s session, and it points to another period of consolidation and volatility driven by uncertainties regarding the future path of central bank interest rates. Speculators in the futures market bought 83,000 ounces in a two-week period to last Tuesday, however with the bulk being driven by short covering the upside potential from fresh longs remain should fundamental developments support a move higher. With that in mind, the attention, apart from developments in the banking sector, turns to US economic data, including a key measure on inflation as well as comments from several Federal Reserve Officials. Support at $1936 followed by $1915 and $1900.
Treasuries surged in price and yields plummeted in London hours on Friday as Deutsche Bank fell victim to the latest contagion of the banking sector woes, with the 2-year yield getting to as low as 3.55% and the 10-year to 3.28%. Treasuries pared much of the London hour gains as yield spent the New York session creeping higher as bank stocks reversed and rose. Treasury Secretary Yellen called an unscheduled Financial Stability Oversight Council meeting which Fed Chair Powell attended. The short statement issued after the market close offered reassurance of the roundness of the U.S. banking system without additional information or plans of action.
St Louis Fed president James Bullard’s remark about having raised his terminal rate dot plot to 5.625% from 5.375% helped lift yields off their lows. The yield on the 2-year finished the day 7bps lower at 3.77% and the 10-year yield dropped 5bps to 3.38%. Over the week, yields declined by around 5bps across the curve. As banks have already been less willing to lend since Q4 last year and bank lending may contract this quarter as the banking sector jitters unfolding, the odds of a U.S. recession have increased, and short-term Treasuries tend to be something valuable to have in an investment portfolio against this backdrop.
Treasury yields dipped sharply on Friday, with the 2-year hitting a multi-month low of 3.55% and the 10-year hitting 3.28%, but sentiment across markets stabilized and yields rebounded, with 2-year volatility far higher as that benchmark pulled higher still to 3.85% into early European hours. Treasury Secretary Yellen called an unscheduled Financial Stability Oversight Council meeting on Friday which Fed Chair Powell attended. The short statement issued after the market close offered reassurance of the roundness of the U.S. banking system without additional information or plans of action.
The market nervousness around the banking sector was evident once again on Friday when a spike in Deutsche Bank’s CDS sent shockwaves to the European banking sector. Fears started as Deutsche Bank said it'll redeem a tier 2 subordinated bond early, even though such moves are usually intended to give investors' confidence in the strength of the balance sheet. But its stock plunged 14% at one point, while other banks like Commerzbank and SocGen also declines. The woes on the European banks’ AT1 market have long-lasting implications on the cost of capital of European banks. Read more from Peter Garnry’s article here.
US bank deposits plunged by nearly $100bn to $17.5tr in the week ended March 15, after the first scare in the US banking sector from the collapse of SVB. The decline was entirely due to a record plunge in deposits at small banks. Treasury Secretary Yellen convened the Financial Stability Oversight Council on Friday morning, but the statement out later only sent assurance messages that the US banking system is sound, and no follow-up measures were announced.
Reports suggested that US authorities are considering expanding an emergency lending facility for banks in ways that would give First Republic Bank more time to shore up its balance sheet. There are still lingering concerns of a bank run in the US, and First Republic remains vulnerable with its stock down over 90% this month.
Flash print of the US March PMIs from S&P were firmer-than-expected. Manufacturing PMI surged to 49.3 from 47.3 previously and services PMI rose to 53.8 from 50.6, both smashing expectations. The data was a reminder that the US economy is still strong even through the recent bank stress has started to weigh on the outlook. Fed commentaries also tilted hawkish, with Bullard (non-voter) revealing that he raised his terminal rate forecast to 5.50-5.75%. He said he sees 80% chance financial stress abates and discussion shifts back to inflation; a lower-probability outcome is recession. Bostic (non-voter) acknowledged that there was a lot of debate at the Fed’s last meeting, and it was not a straightforward decision, but he was comfortable that the Fed can get through this. Barkin (non-voter) similarly emphasised inflation. However, comments from Minneapolis President Neel Kashkari this morning tilted towards economic concerns, as he said that the stresses in the banking sector and the possibility of a subsequent credit crunch brings the US closer to recession.
With bond yields continuing to fall to new lows, down for the 3rd week, and the US dollar index down for the second, the Nasdaq 100 has continued to hit new highs, moving up 17% this quarter while the KBW Bank Index is down by 22%. Quality Mega-cap tech stocks with strong cash flows are being favoured amid the uncertainty with companies with robust balance sheets in focus. Nvidia share are up the most this quarter, up 83% as its datacentre and networking business are being seen as a defensive play. Meanwhile Meta shares up are 71% with investors buying into the fact that Meta’s revenue is expected to rise in 2023 and recover from the prior drop. Tesla shares are also doing this quarter, up 54% as Tesla has cut costs, while the lithium price is down 47% in six months which is helping Tesla’s bottom line.
CBOT wheat jumped almost 6% on Friday and briefly popped above $7 a bushel after local media said Russia may recommend producers temporarily suspend exports of wheat and sunflower oil in order to prevent prices, under pressure from ample supply, from falling further. The price of one of the world's most important food stables tumbled to a 20-month low this month, driven by Russian exports and the Black Sea grain deal. Months of weakness has seen CBOT wheat become the most shorted commodity with speculators currently holding the biggest net short since 2018. However, the latest news is a reminder of the still fragile state of supply, which in the coming months may receive fresh attention as the Ukraine harvest shrinks again and drought grips the US wheat belt.
Chip maker Micron Technology shares have been outperforming the Nasdaq 100, and are up 21% this year, ahead of the company reporting quarterly results after market on Tuesday. Its outlook will be watched closely following the memory chipmaker’s cost-cutting efforts, from headcount reductions to executive compensation cuts, which take hold this quarter. Consensus expects further YoY declines in both EPS and revenue. Elsewhere, drug store/pharmacy giant Walgreens Boots Alliance reports before the bell Tuesday and could see restructuring and capital plans scrutinized, while investors could also react to the drugstore halting the sale of abortion-pills in several US states. Shares are down 14% this year.
We are still outside the main earnings season which starts in a couple of weeks, but there are a couple of interesting consumer-oriented earnings releases worth watching this week. Carnival, one of the world’s largest cruise line operators, reports FY23 Q1 (ending 28 Feb) earnings today before the US market open with analysts expecting revenue of $4.32bn up 166% y/y and EBITDA of $304mn up from a loss of $928mn a year ago. The demand is much more stable and positive compared to the years during the pandemic, but Carnival is battling with elevated debt taken on during the pandemic to stay afloat. In the last 12 months the company has $1.62bn in interest expenses and operating cash flow still around break-even making the situation bad for the cruise liner. Bloomberg’s default probability remains very high.
This week’s earnings releases:
0800 – Germany Mar. IFO Survey
1430 – US Mar. Dallas Fed Manufacturing Activity
1700 – US 2-year Treasury Auction
1700 – UK Bank of England Governor Bailey to speak
2100 – US Fed’s Jefferson (voter) to speak
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy