Opinions are divided as to whether there truly is a risk of wider fallout from Credit Suisse but anytime banks start "breaking," investors get very jumpy as it's not always immediately clear where the risks are lurking or which domino might get toppled next.
It's particularly unsettling for investors and consumers that lived through the Global Financial Crisis in 2007-2008. That crisis was sparked by an entirely different set of circumstance but remember, it started with just one institution - New Century Financial in April 2007, followed by Bear Stearns less than two months later.
It then took over a year for it to balloon into a full-blown global financial crisis, which was tipped over the edge by the collapse of Lehman Brothers in September 2008. Financial markets went into free-fall and the crisis set off the Great Recession. From its peak of 1,300.68 on August 28, 2008, the S&P 500 lost nearly half its value in a little over six months, hitting its low on March 9, 2009. Between 2007 and 2015, more than +500 banks failed. Most were regional banks.
Again, these are very different circumstances, but Wall Street investors may not be willing to wager whether the outcome will be brighter. With the banking headwinds now being felt in Europe, investors are highly anxious to see the European Central Bank's latest policy decision today.
Some anticipate the ECB striking a more dovish tone, perhaps even signaling a pause in its rate hiking campaign as the banking turmoil continues to play out. Such a move will likely raise expectations for the US Federal Reserve to choose a similarly cautious path at its meeting next week on March 21-22.
This is again a huge point of debate with the bulls believing the Fed has no choice but to ease up while bears believe it has no choice but to keep going.
Bears also warn that even if the Fed and other central banks adopt a less aggressive approach, the damage has already been done and financial institutions are going to take a hit one way or another, including massive bond portfolio losses and possibly greater capital requirements.
There is already talk of tougher regulations for mid-sized banks as well as more stringent stress tests for banks overall.
At the same time, there are still very few signs that the US economy has slowed enough to make a meaningful dent in inflation and the Fed can't just ignore that consumer prices are increasing at an annual rate of +6%.
Today, investors will be digesting Housing Starts and Permits, Import/Export Prices, and the Philaedlphia Fed Manufacturing Index. Dollar General and FedEx are the highlights for earnings.
The market is now placing its odds on the Fed only raising rates one more time this year, and thinking by this summer they will be starting to ease. In fact, yesterday the market was showing 99% odds that by December the Fed would be cutting rates.
The market is now a coin-toss on if the Fed will hike at all in its upcoming FOMC meeting next week. That's a massive turnaround compared to what the market was thinking just a few weeks back when Wall Street was talking about a much more hawkish and aggressive Fed.
Interestingly, the Treasury markets are signaling similar thoughts. The theory is perhaps the Fed tightened too much too fast and some things have started to break, i.e the banking system. Many argue that with the regional banks tightening they could quickly do the job of the Fed and slow down spending and the economy.
Most bulls are hoping to see the Fed make one more small rate hike of 25-basis points. The fear is that the Fed could go 50-basis points, which was recently suggested based on strong employment and continued hot inflation.
On the flip side, there's fear that if the Fed decides to fully pause and do nothing at next week's meeting, it might spook the market, making many traders and investors believe the current banking crisis is much worse than we currently know and there is more contagion risk than we thought.
Again the Fed is going to have to carefully thread-the-needle. the good news for the US consumer is that crude oil prices are now -45% lower than last year's high and that mortgage rates are down -50 basis points in the past couple of weeks.
I suspect bulls will continue to try and hideout in big tech stocks or the Nasdaq, which has much less exposure to the banking stocks.
Remember, when we finally bottomed in 2009 it was the Nasdaq that led us out of the hole. Lots of new and interesting puzzle pieces are now on the table.
Bank of America Won Big From the Silicon Valley Bank Collapse: As startups and VCs scramble to get their money into safe hands following the collapse of Silicon Valley Bank, they’ve turned to a Wall Street stalwart: Bank of America. The bank brought in more than $15 billion in deposits as SVB sunk. Sources familiar with the matter told Bloomberg the inflows came from fearful customers moving their money to an institution—the second biggest bank in the States—that is seen as simply too big to fail (and is considered to be so by the Federal Reserve). Bank of America isn’t the only giant bank seeing an influx of new trade. According to reports from the Financial Times, JPMorgan is supporting its raft of new customers by shortening the waiting time for opening an account. It is also speeding up the rate at which new customers can access funds in order to ensure they can pay staff this week, confirmed a source briefed on the matter. Citigroup has also reportedly scrambled to onboard customers, with all the large financial institutions seeing a particular push from account holders with holdings above the $250,000 threshold that is guaranteed by federal insurance—despite the government pledging they would still be covered. It has now been confirmed by SVB that Goldman Sachs was the buyer of the failed bank's troublesome portfolio. A spokesperson told Reuters the transaction had been carried out “at negotiated prices” and netted SVB $21.45 billion in proceeds. Source Fortune
Home Builder Sentiment Rises for Third-Straight Month Amid Tight Inventories: The National Association of Home Builders/Wells Fargo's gauge of builder sentiment increased 2 points to 44, figures released Wednesday showed. Analysts had expected this index to come in at a reading of 40. Still, readings under 50 for this index show a larger proportion of builders responding to the survey see conditions as "poor" than those who see conditions in the market as "good." Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory," NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala, wrote in the press release. She added, given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook. The sudden collapse of Silicon Valley Bank and Signature Bank within the last week has spilled into the Treasury market, sending mortgage rates sharply lower in turn. The average 30-year mortgage plunged to 6.57%, per the latest Mortgage News Daily quote. Source YahooFinance
CEO Optimism Was on the Rise Before SVB Meltdown: Corporate America started the year slightly more optimistic about the economy, and had plans to hire and spend at rates that would keep growth humming, according to a survey of more than 100 chief executives of America's biggest companies by the Business Roundtable (BRT). Executives' outlook suggests the U.S. is not plunging into a recession. But it does imply slow growth and wariness around hiring, sales and capital spending. That aligns with what other data is showing. Hiring is strong, and economic activity is still holding up. But the risks that may ultimately emerge from the Fed's aggressive tightening campaign to whip high inflation may be only starting to become apparent. However, CEOs were polled before the Silicon Valley Bank meltdown. It is too early to say whether the banking troubles will result in constrained credit or a broader loss of business confidence. The latest CEO Economic Outlook Index, compiled by Business Roundtable, rose 6 points. That modest uptick is the first increase since the final quarter of 2021. The CEOs expected the economy to grow +1.4% this year, below the long-term trend in the U.S., but not the kind of contraction you would expect to see in a recession. Source Axios
Economist Who Won Nobel Prize for "Bank Run" Research Explains SVB's Collapse: Douglas Diamond, professor at the University of Chicago’s Booth School of Business, shared the 2022 Nobel Prize for Economics with his research partner, Philip Dybig of Washington University in St. Louis, and former Fed chairman Ben Bernanke. The Diamond-Dybig research that captured the Nobel stressed that banks are inherently fragile and vulnerable to “runs,” because if customers exit en masse, the lenders may need to sell their bonds or loans, which would have fully paid off on maturity, at fire-sale prices. Hence, a panic can unnecessarily ruin an otherwise healthy bank. In October, just after receiving the prize, Diamond warned in a Fortune interview that the Fed’s policies of raising rates at a brutal, virtually unprecedented pace would trigger dangerously big losses in the bond portfolios of companies and banks that believed inflation-adjusted yields sitting at near-zero for years would stay there for years to come. But in our hour-long interview on the SVB debacle, Diamond stated that though Fed policy hurt, it wasn’t the main reason for the implosion. Nor did SVB suffer the classic “sound bank wrecked by a stampede” scenario. Instead, SVB deployed just about every bad policy on both the assets and liabilities sides of its balance sheet. For Diamond, SVB is a case study in how setting a rickety structure to enable breakneck expansion created daunting risks that prudently run banks, despite the Fed’s huge run-up in rates, have avoided. Source Fortune
Ryan Reynolds-Backed Mint Is Bought by T-Mobile for $1.35 Billion: T-Mobile US Inc. is buying Mint Mobile, the budget wireless provider partly owned by actor Ryan Reynolds, for as much as $1.35 billion in an effort to bolster its prepaid phone business and reach more lower-income customers. The second-largest US wireless provider is acquiring Mint’s closely held parent company, Ka’ena Corp., with a combination of 39% cash and 61% stock, according to a statement Wednesday. The ultimate purchase price will be based on Mint reaching certain performance goals, both before and after the transaction closes. Bloomberg Intelligence analysts John Butler and Hunter Sacco estimate the deal may boost T-Mobile’s customer count by 2 million users. Source Bloomberg
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