Mar 20, 2023
U.S. stocks stage relief rally as banking jitters ease
BNN Bloomberg's closing bell update: Mar. 20, 2023
Stocks climbed as regulators worldwide rushed to shore up market confidence, with the recent financial turmoil spurring speculation on a slower pace of tightening from major central banks.
An earlier flight-to-safety bid waned, with all 11 groups in the S&P 500 gaining. A gauge of US lenders climbed after last week’s 15 per cent plunge. First Republic Bank sank on another credit downgrade, missing out on a rebound by its regional peers led by New York Community Bancorp. UBS Group AG rallied as investors focused on the upside of its Credit Suisse Group AG takeover.
Following the biggest weekly surge for the Nasdaq 100 since November, the tech-heavy measure underperformed as a recovery in risk appetite sent Treasuries down. Global central banks witnessed no dash for dollars after uniting with the Federal Reserve to ease access to supplies of the US currency — an indication that the latest bout of banking turmoil may not be causing undue stress to the financial system.
To a large extent, the market feels the banking turmoil is not systemic, it’s isolated and there will be a solution to “contain the damage” and insulate the rest of economy, according to Chuck Cumello at Essex Financial Services.
“Monday’s session was relatively tame versus what we anticipate will be a week of elevated realized volatility,” said Ian Lyngen at BMO Capital Markets. “This isn’t to suggest US rates are experiencing a moment of calm before the storm – if anything, choppy price action has increasingly become the norm. Rather, the macro uncertainty is much likelier than not to intensify as the week unfolds.”
Just a couple of weeks ago, investors were betting the Fed would raise rates close to 6 per cent and the European Central Bank would hike past 4 per cent. Now markets imply the tightening cycles are almost over and wager on four rate cuts in the US by year-end. Overnight indexed swaps price in a 75 per cent chance of a quarter-point hike by the Fed this week.
Swap traders currently see the Fed’s benchmark ending the year around 4 per cent — a whole percentage point below the central bank’s rate estimate in the December “dot plot” that comes as part of the quarterly economic projections. In keeping with the theme of instilling confidence in the banking system, Fed Chair Jerome Powell will possibly reiterate that further progress needs to be made toward the goal of price stability, Lyngen noted
A “dovish hike” remains our bias, he added.
“We expect a 25 bp hike and higher dots in the dot plot,” said Chris Low, chief economist at FHN Financial. “50 bp would be reckless, but no hike would suggest the bank crisis supplants the fight against inflation. 25 bp seems just right. Of course, our view from midtown Manhattan may not be quite the same as the Fed’s from central DC. If the Fed chooses not to hike, the language they use to couch that choice in will be key to shaping the entire yield curve.”
Market easing expectations have “run wild” because the media blackout has restrained Fedspeak, according to Win Thin at Brown Brothers Harriman. While nobody knows the extent to which the recent turmoil is impacting the rate hike debate, Fed officials will likely fall in line with ECB President Christine Lagarde, who last week stressed that there is no trade-off between price and financial stability.
“This was a very strong statement that suggests any banking sector issues won’t derail the tightening cycle,” he noted. “We think this view is held by pretty much every central bank, including the Fed, which supports our call for a 25 bp hike this week.”
Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be the beginning of a painful and “vicious” end to the bear market in US stocks.
The turmoil in the US banking sector has made the possibility of a soft landing for the economy unlikely and increased the possibility of a “Minsky moment in markets and geopolitics,” according to Marko Kolanovic, the chief global markets strategist at JPMorgan Chase & Co. The concept stems from the work of Hyman Minsky, a U.S. economist who specialized in how excessive borrowing fuels financial instability.
“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” Kolanovic wrote.
The Federal Home Loan Bank System issued US$304 billion in debt last week, according to a person familiar with the matter, who asked not to be identified discussing non-public data. That’s almost double the US$165 billion that liquidity-hungry lenders tapped from the Fed.
A banking crisis in a matter of days has emerged to potentially choke off a hot economy, raising the odds of a recession that the Fed has been working to avoid. As Powell and his colleagues gather Tuesday for a two-day policy meeting, the question is whether the brakes have been suddenly slammed too hard. The central bank wanted a slowdown — something seen as essential to tame inflation — but not a crisis capable of sinking the economy into a deep recession.
“A 25 basis point hike is the most likely outcome,” said Seema Shah at Principal Asset Management. “If market turmoil deepens over coming days, even a pause is possible. Ultimately, financial conditions will tighten further — either via additional central bank tightening as they try to tame inflation or via a deterioration in the current banking crisis.”
In the likely volatile period ahead, high-quality, defensive assets should be sought out, while diversification will be increasingly important, Shah added.
Keith Lerner at Truist Wealth, says he also prefers staying defensively positioned even as the market appears to be fairly resilient.
“Although a Fed pause or pivot could trigger a short-term rally, we don’t see this as a cure-all, especially if the economy falls into recession later this year,” Lerner added. “The Fed’s reaction function to current events will likely be less aggressive in providing monetary support relative to past periods given the conundrum of still-elevated inflation.”
The banking-sector turmoil combined with a previous increase in funding pressures has left financial markets keenly attuned to what the Fed will say about its US$8.6 trillion balance sheet.
Until this month that had been shrinking as part of the Fed’s efforts to return it back to pre-pandemic levels. But now it has started to expand again as the Fed acts to bolster the banking system through a slate of emergency lending programs. Its latest step came Sunday, when it moved with other central banks to boost US dollar liquidity. Some say financial-stability concern may spur policymakers to dial back the runoff of its bond portfolio, a process known as quantitative tightening that’s designed to drain reserves from the system.
The failure of three lenders at home and a spiraling banking crisis in Europe have bent the US stock market, but didn’t break it — so far. Beneath the surface, the firms with the shakiest finances are trailing their sturdiest peers by a magnitude seen few times before.
Dividing the Russell 1000 Index into four baskets based on the level of debt load compared with market capitalization shows how wide the gap has become. The basket of firms with the highest credit burden fell 3 per cent last week, trailing a basket with the healthiest finances by 4.8 percentage points. Since 2008, the gap was higher in just two instances - the climax of the pandemic rout in March 2020 and the week Lehman Brothers went under in September 2008.
Key events this week:
- US existing home sales, Tuesday
- US Treasury Secretary Janet Yellen to appear at Senate subcommittee hearing, Wednesday
- FOMC rate decision, news conference from Chair Jerome Powell, Wednesday
- EIA crude oil inventory report, Wednesday
- Eurozone consumer confidence, Thursday
- BOE interest rate decision, Thursday
- Swiss National Bank rate decision and press conference, Thursday
- US new home sales, initial jobless claims, Thursday
- US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday
- Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
- US durable goods, Friday
Some of the main moves in markets:
- The S&P 500 rose 0.9 per cent as of 4 p.m. New York time
- The Nasdaq 100 rose 0.3 per cent
- The Dow Jones Industrial Average rose 1.2 per cent
- The MSCI World index rose 0.7 per cent
- The Bloomberg Dollar Spot Index fell 0.4 per cent
- The euro rose 0.5 per cent to US$1.0723
- The British pound rose 0.9 per cent to US$1.2279
- The Japanese yen rose 0.3 per cent to 131.43 per dollar
- Bitcoin fell 0.3 per cent to US$27,890.29
- Ether fell 2.3 per cent to US$1,758.27
- The yield on 10-year Treasuries advanced five basis points to 3.48 per cent
- Germany’s 10-year yield advanced two basis points to 2.13 per cent
- Britain’s 10-year yield advanced three basis points to 3.31 per cent
- West Texas Intermediate crude rose 1.2 per cent to US$67.57 a barrel
- Gold futures rose 0.5 per cent to US$2,000.60 an ounce