Credit/Financial Crisis in regional banks calls for WARREN B! FED meeting to save or shit?
Markets hanging on by a string it seems. Bulls still have a chance
The insane week overall, Financials took a beat down and smaller banks in the US made headlines as nearly 200 regional banks are at risk of replicating SIVB 0.00%↑ magic trick.
This past week we saw financials XLF 0.00%↑ tumble hardcore as credit risks increased. Regional banks are in a tough spot, Yellen even said that the focus wasn’t saving these smaller banks causing a lot of panics. This actually presents an opportunity in the larger banks, possible longer-term positioning into banks like GS 0.00%↑ JPM 0.00%↑ WFC 0.00%↑ BAC 0.00%↑ , and others as they look to acquire what is remaining of the regionals after all of this.
We had mixed reactions in the overall market to this possible credit crisis, tech names are up, $SPX is barely down on the week compared to what had happened. However this could be the start of a reversal.
The ECB hiked 50bps this week, and CS 0.00%↑ is about to get absorbed by USB 0.00%↑ (down heavy).
The overall economic activity is causing investors to increase hope that the Fed is going to start easing and put rate hikes on hold. This doesn’t seem to be the case, even though they just wiped out half of their QT in a week. So where does that leave us for the week ahead?
Fed week coming in HOT
We’ve got a rate decision coming out, as of Sunday March 19th, there’s a 62% chance of a 25bps hike and a 38% chance of not hike at all. Meaning anything other than 25bps is going to be a huge shock to the market. Causing a large move, the way that the Fed is reacting we could lean a little more towards no hike by the meeting.
Realistically, inflation data is on the healthier side of things as PPI came out at a large decrease, now we wait for PCE (Fed’s favorite metric).
The Fed might not need to hike as much as it had originally planned, especially with what’s going on with the balance sheet. Huge add last week $300B worth, erasing half of QT.
There is also a chance that there is a 100bps cut by the end of the year, if that should happen, then we can call the “bottom” of the market more confidently, however, the Fed is playing with fire in terms of inflationary cycles. There is a lot up in the air right now,
Credit Crisis Shaping
The bond market, yields, and credit spread making headlines as the financial names of the market are getting beaten hard.
Below is a combination of the top 9 banks in the US. Down since March09 14%.
Combination of JPM 0.00%↑ BAC 0.00%↑ C 0.00%↑ WFC 0.00%↑ USB 0.00%↑ PNC 0.00%↑ TFC 0.00%↑ GS 0.00%↑ COF 0.00%↑ TD 0.00%↑
Now compare this to the IAT 0.00%↑ index which is the regional bank index, in the same time down 27%.
2-year and 10-year yields experienced the largest drop since the COVID drop, which spells trouble in these markets. There is increased risk aversion in lower growth expectations overall. The 10-year is down 13.5% in 2 weeks and the 2-year down 20.5% in the same period.
Long-term credit spreads widened to four-month highs, and shorter-duration bonds and bonds issued by regional banks saw the most volatility naturally. Wider spreads mean increased volatility and economic risk in the financial markets. These credit spreads are based on similar maturity bonds with different ratings for those that don’t know.
S&P 500, Tech & Small Caps
Market reaction was fairly positive this week to the news that banks we’re failing. Similar to the Lehman crash and pop that happened in 2008. We’ll see where we land because from a macro perspective stocks should be in the gutter, from a technical we can see more.
The premise of this week should be pop and drop, but what do we need to watch to see clues of this happening?
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