The US stocks first fell then gained yesterday. The price action was, again, mostly driven by the bank stocks, both because of, and thanks to Janet Yellen’s comments to US lawmakers.
Remember, on Wednesday, US Treasury Secretary Janet Yellen had said that they don’t consider providing “blanket insurance” for banking deposits after the collapse of Silicon Valley Bank (SVB) – causing renewed pressure on banks, especially on the US small regional banks.
Then yesterday, Janet Yellen said that the US regulators are ready to take additional steps to protect deposits if needed.
Her comments helped stocks recover early-session losses.
Likes of JP Morgan, Goldman Sachs and Citi rebounded after the comment. But trading in Asia hints that the stress over banks is not over just yet. HSBC lost more than 3% in Hong Kong, as news that UBS and Credit Suisse were among banks under the scrutiny of the US DoJ for having helped Russian oligarchs to evade sanctions.
If we summarize
The new market game is being played between two camps: ‘the financial stress and how the authorities are dealing or promising to deal with potential renewed turmoil’ camp, and ‘the recession worries’ camp.
While the recession worries are not entirely bad for the stock valuations – at least in the immediate term, as they pull the yields lower, the financial stress is much less welcome, and there is a much stronger consensus among investors that… financial stress is bad.
The US 2-year yield is now headed to the levels, around 3.80%, that were tested when the SVB collapsed.
Whereas Jerome Powell has been quite clear at his post-FOMC speech Wednesday that the Federal Reserve (Fed) will continue its fight against inflation, that there is certainly one more rate hike on the horizon before the Fed pauses and keeps the rates steady.
But in vain, swap traders give no more than a 50-50 chance for another rate hike, activity on Fed funds futures hints that there will probably be no rate hike at the FOMC’s next meeting, with around 67% chance, and the more worryingly, the bets for a 75 to 100bp cut before the year end is being cemented.
Why? Because last year, on March 21st 2022, Jerome Powell had said that ‘there’s good research by staff in the Fed system that really says to look at the short – the first 18 months – of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak’.
And bingo, the expected 3m T-bill rate in 18 months and the 3m T-bill today is inverted. The only times this happened in the past was the 2000 tech bubble, the 2007/2008 subprime crisis and the Covid pandemic. So either you believe what Jerome Powell says today, or you believe what he said a year ago. But the markets put more weight to what he said a year ago, and bet on a coming recession.
On the data front, the US durable goods orders and the flash PMI data will be closely monitored for further signs of potential weakness after the weekly unemployment claims came in below expectations yet again, and continue to hint that the US jobs market is doing fine despite tens of thousands job cuts, especially in the tech companies.
For now, though, the falling yields, and the banking turmoil, is a boon for the tech stocks. The FAANG stocks are up by more than 13% since 10 days, and Bitcoin gained up to 50%.
Crude oil shortly spiked above the $70 mark, but saw decent resistance at this level given that the financial stress seriously deteriorated global growth prospects, and demand outlook. Plus the weekly stock inventories data showed that the US crude inventories increased by 1.1 mio barrels last week, while analysts were expecting a 1.7 mio barrel decrease. That’s also not excellent news for the bulls, and also explains why the bears are convincingly selling above the $70 mark.
In the FX, the lower yields keep a decent pressure on the US dollar’s shoulders, giving other pairs field to extend gains. The EURUSD extended gains to 1.0930 yesterday, while Cable rose to 1.2343 after the Bank of England (BoE) raised the interest rates by 25bp as expected, adding that there could be further hikes if the bank sees signs of persistent inflation. For now, they probably also see that inflation in the UK is not headed toward the right direction.
In precious metals, gold continues flirting with the $2000 offers, though I still believe that an eventually waning bank stress is a threat of a decent downside correction, which could pull the price of an ounce all the way down to $1900.
