Investors continue to debate how damaging the turmoil in the banking sector might be to the economy and what it might mean for the Federal Reserve's policy meeting this week.

The good news is that there have been no new bank failures since last week after the US made moves to add liquidity lifelines. Credit Suisse has by far been the biggest bank to run into trouble. The Swiss institution is what's considered a "global systemically important bank," meaning that if it fails, it could have ripple effects through the global economy. Swiss Regulators struck a deal with UBS over the weekend to buy Credit Suisse for over +$3 billion, with the Swiss government providing more than +$9 billion to backstop potential losses and another +$100 billion to provide liquidity assistance.

To be fair, Credit Suisse has long-running problems that have been raising concerns about its financial stability. Meaning that while the current waves rippling through the banking sector did contribute to the firm's liquidity problems, other mistakes and missteps compounded the crunch.

The same could be said of the US bank failures last week with each one dealing with unique circumstances that don't necessarily apply to most banks. Still, considering the cracks that are beginning to form as a result of the Fed's tightening and rate hiking campaign, the idea that the central bank still hasn't lifted them as much as needed raises concerns about more serious accidents in the financial sector ahead.

Bottom line, Chair Powell and the Fed are really having to thread-the-needle as the market is now talking about rate cuts coming later this year with banks falling under more stress and pressure, while the Fed is still needing to fight inflation.

There are several big concerns for the banks, i.e. the ability for online consumers to quickly and aggressively make a run on a bank. In other words, if someone mentions something negative on social media it only takes a few moments to stir the crowd and cause a bank run via real-time online banking access.

Many regional banks are also currently experiencing record setting withdraws as many are still only offering minimum returns on deposits while many short-dated US Treasuries and larger national banks are offering +4% and +5% interest opportunities.

Keep in mind, many regional banks are somewhat stuck holding longer-term bonds. Those who didn't properly hedge the rate risk could be facing a double-edge sword as depositors make withdraws and bond prices and or other long-term investments deteriorate.

The Fed recently opened a borrowing "discount window" for these banks to help ease some of their pain, but at the same time this creates mixed emotions and signals on Wall Street between Quantitative Tightening and Quantitative Easing.

Most on Wall Street expect the Fed will lift rates by 25 basis-points at its policy meeting on Tuesday-Wednesday, assuming no other bank stresses materialize.

Bulls are hoping the Fed will also signal a pause in rate hikes for the May meeting (no meeting in April) which could help calm investor nerves. Many bulls also point out that historically, once the Fed pauses its hiking campaign, rate cuts are usually not far behind. Rate cuts have typically been good for stocks as they make borrowing less expensive, in turn fueling higher earnings expectations and investor risk appetite.

It's worth noting that some Wall Street insiders are actually worried that the Fed might leave rates "unchanged" at this week's meeting, which investors could take as a sign that the trouble in the banking sector is more widespread and serious than realized.

There is no economic data due today but investors are anxious to see housing data later this week, including Existing Home Sales tomorrow and New Home Sales on Thursday. "Shelter" accounts for the largest share of the Consumer Price Index and contributed to +70% of the gauge's monthly increase in February.

First Price Decline in US Housing Market in Over a Decade: Redfin reported that US housing prices fell by -1.2% from February of last year to February of this year, making this the first year-over-year price decline in US housing since 2012. If the regional banking crisis spreads there's fear that it could put even much greater pressure on US real estate as lending would dry up in a more significant manner. Source Redfin

Interesting Thoughts on the "Banking Crisis" from Bridgwater Billionaire Ray Dalio: The famous billionaire investor posted his thoughts late last week and they have been traveling around inside the trade the past few days. I included an interesting paragraph from the blog... "The really big problem will come when there is too much of this money printing to provide creditors with adequate real returns, which will lead them to start selling their debt assets, which will substantially worsen the supply/demand balance. With the enormous size of US debt assets and liabilities outstanding, plus lots more to come, there is a high risk that the supply of government debt will be much larger than the demand for it, which will cause too-high real interest rates for the markets and the economy, leading to debt and economic pain that will eventually lead the Federal Reserve to switch from raising interest rates and selling debt (QT) to lowering interest rates and buying debt (QE). This will lead real rates to fall, which will lead to a high risk that there will be more selling of debt assets because of the bad real returns that these debt assets are providing. While people are now not thinking about the next interest rate cut and QE of the Fed, we should because the timing of these is probably less than about a year away and that will have big effects. I think that there is a good chance that it will produce a big decline in the value of money. So, it looks likely to me that the financial/economic picture over the next year or two will be tough."

Surging Chinese Oil Demand Pushes Shipping Costs Sharply Higher: China is on an oil-supertanker hiring spree, a sign energy demand has sped up after the world’s second-largest economy limped out of its Covid-19 lockdowns. Traders carry crude to China, the world’s biggest oil importer, in Eiffel Tower-size tankers called Very Large Crude Carriers that each lug two million barrels of oil. The cost of chartering the most coveted type of these tankers, featuring modern exhaust systems, has shot up to nearly $100,000 a day, ship brokers say. That is double the rate from a month ago. Behind the rise is a spurt of crude demand in China’s oil-refining industry, where U.S. oil is in particularly high demand right now. Chinese crude imports are on track to match or surpass the record level from June 2020, according to commodity-tracking firm Kpler. Chinese imports haven’t fed into higher prices so far. On the contrary, benchmark Brent-crude prices have dropped 13% this month to $72.97 a barrel, their lowest level since late 2021. Turmoil in the U.S. and European banking system raised fears of a recession that would crimp Western energy consumption. Still, a sustained increase in Chinese energy demand could boost gasoline and natural-gas prices globally, complicating the task of central banks trying to tamp down inflation. Some energy executives and traders say quenching China’s thirst for oil is likely to propel prices later this year. Source WSJ

CFTC Delays March 17 Commitments of Traders Report: The U.S. Commodity Futures Trading Commission (CFTC) said its weekly Commitments of Traders report scheduled for release on Friday has been delayed while its staff reviews and validates data following a cyber-related incident last month at ION Trading. The CFTC did not offer a new release date. Source Reuters

Weaker Local Banks Could Harm Small Businesses and Less-Urban Areas: Tighter belts for smaller banks could count as a big problem for some parts of the US. An emerging concern is that customers at community and regional banks, worrying that their deposits aren’t safe, might pull their money, putting it into money-market funds or accounts at bigger banks. Regulators’ move last Sunday to protect depositors at SVB and Signature, and big banks coming together on Thursday to shore up First Republic with a $30 billion infusion of deposit cash, were aimed at avoiding such an eventuality. With hope, these fire lines will hold. Even if any outflows are halted or reversed, small banks may now grow cautious, such as by simply sitting on more of their cash as a defensive measure. Doing so would effectively reduce their capacity to extend credit. For small and midsize businesses that rely on smaller banks, this would be worrisome. Smaller banks are particularly important in lending to commercial real-estate projects. Banks in the U.S. outside the 25 largest banks by domestic assets represent close to 40% of all bank lending—but about two-thirds of commercial real-estate loans, according to Federal Reserve data. They represent about 70% of construction and land development loans, and more than 90% of all loans secured by farmland. While a pullback in lending by smaller banks would weigh on small and midsize businesses throughout the country, the effects could be most keenly felt in places where there are fewer lending options, such as those that are far from major urban centers. Source WSJ

Hospital ‘Black Boxes’ Put Surgical Practices Under the Microscope: Black boxes on airplanes record detailed information about flights. Now, a technology that goes by the same name and captures just about everything that goes on in an operating room during a surgery is making its way into hospitals. The OR Black Box, a system of sensors and software, is being used in operating rooms in 24 hospitals in the U.S., Canada and Western Europe. Video, audio, patient vital signs and data from surgical devices are among the information being captured. The technology is being used primarily to analyze operating-room practices in hopes of reducing medical errors, improving patient safety and making operating rooms more efficient. It can also help hospitals figure out what happened if an operation goes wrong. OR Black Box systems, made by Surgical Safety Technologies Inc. in Toronto, analyze data to provide insights for hospital personnel in the form of graphs, comments, timelines, and video and audio clips. Hospitals can view performance over time or can analyze particular operations. Black boxes have been in use in three operating rooms at Mayo Clinic for more than a year. Source WSJ

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