Futures Tumble, Yields Crater, Banks Plunge As Market Realizes Latest Bailout Is Insufficient
Yesterday, when describing the nuances of the latest bank bailout (and big bank subsidy) we explained why the “Treasury is quietly freaking out” and asked rhetorically “ETA until market realizes $25BN is nowhere near enough and futs react appropriately?”
ETA until market realizes $25BN is nowhere near enough and futs react appropriately?
— zerohedge (@zerohedge) March 12, 2023
Turns out the answer was about 12 hours, because after initially spiking, and rising just shy of 4,000 amid widespread acceptance that the Fed’s tightening cycle is finally over, fears have shifted back to the growing bank crisis and depositor run, and futures were back down to 3,900, up just 0.2%, and wiping out most of their overnight gains…
… as bank stocks have resumed their plunge led by small US banks such as First Republic, which is down 60% this morning as the market realizes the bank run is only starting…
… but it’s not just the regional US banks which we warned were about to be wiped out: big international banks are also getting crushed with Italian bank giant UniCredit shares halted, while Credit Suisse shares are not only 10% lower to new all time lows, but its Credit Default Swaps just hit a record wide.
Here are some notable premarket movers:
- Most US banking stocks cede early gains to trade around flat or in the red, as initial optimism fueled by US authorities’ decisive action on SVB fades and fears mount for the health of the broader financial system. JPMorgan (JPM US) -2%; Bank of America (BAC US) -6.3%, Wells Fargo (WFC US) -3.5%, Citigroup (C US) -2.7%, Charles Schwab (SCHW US) -18%, Western Alliance Bancorp (WAL US) -25%, PacWest Bancorp (PACW US) -36%
- First Republic Bank (FRC US) shares fell 63% after the US lender moved to try and quell concern about its liquidity following the failure of Silicon Valley Bank. The declines came after the bank said late Sunday it had more than $70 billion in unused liquidity from agreements that included the Federal Reserve and JPMorgan.
- US-listed Chinese stocks rise in premarket trading, on track to halt five days of declines, as China’s new premier Li Qiang called for better cooperation between the two countries and signaled support to the private sector. Alibaba (BABA US) +0.8%, Baidu (BIDU US) +1.4%, PDD Holdings (PDD US) +1.2%, NetEase (NTES US) +1.9%, Trip.com (TCOM US) +1.2%, Li Auto (LI US) +2.8%
- Cryptocurrency-exposed stocks rose after Bitcoin jumped on US agencies’ pledge to fully protect all Silicon Valley Bank depositors following the lender’s collapse. Marathon Digital (MARA US) +7.3%, Riot Platforms (RIOT US) +2.8%, Hut 8 Mining (HUT US) +5.6%, Coinbase (COIN US) +4%
- Provention Bio (PRVB US) shares rise as much as 264% to $24.40 in US premarket trading after Sanofi agreed to buy the biotech for $25/share in cash, in a $2.9 billion deal intended to bolster the French drugmaker’s portfolio of diabetes medicines with a new therapy recently approved in the US.
- Gold miners could be active on Monday as gold kept rising, with investors flocking to havens following the collapse of SVB. Watch shares including Barrick (GOLD US), Agnico Eagle (AEM US), Kinross (KGC US).
Meanwhile, with Goldman joining ZH in calling a Pause in the Fed’s hiking cycle, 2Y yields have plummeted an insane 50bps…
… suffering the biggest 2-day drop since Black Monday in October 1987! So much for all those macrotourists preaching “higherer for longerer” (but please buy their newsletter, they need the money to fund their own bailout).
And here is how the Fed’s rate hike narrative died a gruesome death in just 3 trading days.
While not nearly as pronounced as the collapse in the short end, the 10-year yield fell to a one-month low and the dollar extended a decline against major peers. The yield on two-year German debt plunged 38 basis points to 2.72%, putting them on course for the steepest two-day fall on record.
The turmoil following SBV’s demise has caused a rapid repricing in markets for where the Federal Reserve will take policy. Swaps traders now only roughly even odds the central bank will raise rates at its meeting next week, especially after Goldman economists said they expect no change in the policy rate following the collapse of SVB. Expectations had built for a hike of as much as 50 basis points after Chair Jerome Powell addressed lawmakers Tuesday.
“The failure of SVB puts the Fed’s focus on financial stability,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets. “This is a difficult position Fed is in, on the one hand it needs to keep hiking to arrest inflation, but also it needs to protect the financial system. Feels like a lose-lose situation for the Fed and the market” which of course is a paraphrase of what we said last Thursday.
Powell trapped: more hikes and CRE leads to tens of billions of incr. losses across banking system (AFS+HTM); small banks now reserve constrained guaranteeing something “breaks.” Meanwhile inflation still hot. https://t.co/Nqm3R6RBw0
— zerohedge (@zerohedge) March 9, 2023
While US futures faded fast, Europe was a mess from the start as shares of European banks and insurers slumped on Monday, while yields on European bonds fell on anticipation that the Silicon Valley Bank collapse could force central banks to slow the pace of interest rate hikes. The pan-European bank stocks index was down by the most in a year, while real estate stocks also slipped but outperformed the broader index as the sector typically benefits from dovish monetary policy shifts. Banking stocks index is down 5.7%, worst performing European sector, while the broader market loses about 2.8% Commerzbank -12%, Banco de Sabadell -9.4% and ING -9% are top losers; and of course, as noted above Credit Suisse shares down 13% to new record low.
Earlier in the session, Asian stocks erased earlier declines as bond yields slid after Goldman Sachs Group Inc. said the Federal Reserve will stand pat next week. Equities in China and Hong Kong rallied the most. The MSCI Asia Pacific Index advanced as much as 0.6%, reversing a loss of up to 0.9%. Chinese shares led the charge higher as traders bet on policy continuity after the nation retained several familiar faces in its economic leadership team, including the central bank governor. Tech shares in the region also got a boost from falling US Treasury yields as Goldman Sachs economists said the recent stress in America’s banking system may prompt the Fed to pause its monetary tightening cycle next week. It also flagged uncertainty about the rate path in the months ahead. READ: Rate Bets Unwind Is Savage Enough to Evoke Black Monday Meanwhile, Japanese benchmarks were weighed down by financial shares as investors assessed the fallout of Silicon Valley Bank’s collapse. Asia’s benchmark stock gauge is trying to recover from last week’s 2% drop as SVB’s downfall highlighted the impact of higher interest rates on the US economy and financial system. “Although we do not think there is any material fundamental impact on Asian stocks, equity investor sentiment will likely remain fragile for now,” Nomura strategists including Chetan Seth wrote in a note. Market focus will likely remain on factors such as whether there are deposit outflows from other relatively smaller regional banks, they added.
Japanese stocks fell for a second day as investors continued to assess whether Silicon Valley Bank’s failure poses risks for the broader financial markets. The Topix Index fell 1.5% to 2,000.99 as of market close Tokyo time, while the Nikkei declined 1.1% to 27,832.96. The Topix’s gauge for banks and insurers was among the biggest sector losers. Mitsubishi UFJ Financial Group Inc. contributed the most to the Topix Index decline, decreasing 3.5%. Out of 2,160 stocks in the index, 202 rose and 1,906 fell, while 52 were unchanged. “SVB’s bankruptcy news and yen’s appreciation both dragged Japanese equities lower,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. “On the other hand, as the pace of US monetary tightening is expected to slow down given the situation, there might be some positive impacts as well.”
In FX, a gauge of the dollar fell for a third session as US government measures to ease concern over the collapse of Silicon Valley Bank curbed demand for havens. There’s expectation that the US emergency measures will limit the shock from SVB’s failure, including contagion risks, according to Teppei Ino, head of global markets research at MUFG Bank Ltd.
“Dollar-yen was bought back to a certain extent as traders and investors welcomed measures including protection of depositors and securing of liquidity”.
In rates, treasury futures just off highs of the day after gapping up, as investors remained in risk-off mode as the collapse of Silicon Valley Bank reverberates through financial markets. Yields richer by more than 25bp across front-end of the curve with 2s10s, 5s30s spreads steeper by 15bp-16bp on the day; 10- year yields lower by around 12bp at 3.58% with bunds outperforming by 8bp in the sector. Curve is aggressively steepening as Fed-dated OIS swaps gap lower and rate-hike premium erodes from front-end of the curve; the 2s10s has moved from -110bps last week to 67% today after Goldman Sachs economists said they no longer expect the Fed to deliver a rate increase next week. Fed-dated OIS pricing in around 15bp of rate hikes for the March policy meeting with Fed peak gapping lower to around 4.90% for the June decision, implying around 35bp of additional hikes for this cycle.
Commodities have, ex-spot gold, come under marked pressure as risk sentiment deteriorates throughout the European morning. Specifically, WTI and Brent front months have suddenly tumbled, accelerating an earlier loss, as the market prices in a recession.
Base metals are well off best levels, given the risk tone, but are somewhat cushioned by the USD continuing to slip. Action which is assisting spot gold, alongside traditional haven allure, with the yellow metal up to USD 1893/oz at best.
Lluckily, there is nothing scheduled on todays’ econ calendar; instead we will be focusing mostly on the worsening bank crisis.
- S&P 500 futures down 0.6% to 3,876.5
- STOXX Europe 600 down 1.1% to 448.71
- MXAP up 0.2% to 158.26
- MXAPJ up 1.0% to 508.50
- Nikkei down 1.1% to 27,832.96
- Topix down 1.5% to 2,000.99
- Hang Seng Index up 1.9% to 19,695.97
- Shanghai Composite up 1.2% to 3,268.70
- Sensex down 1.2% to 58,442.44
- Australia S&P/ASX 200 down 0.5% to 7,108
- Brent Futures down 0.2% to $82.65/bbl
- Gold spot up 0.5% to $1,878.19
- U.S. Dollar Index down 0.56% to 103.99
- German 10Y yield little changed at 2.38%
- Euro up 0.6% to $1.0710
Top Overnight News
- US authorities took extraordinary measures to shore up confidence in the financial system after the collapse of Silicon Valley Bank, introducing a new backstop for banks that Federal Reserve officials said was big enough to protect the entire nation’s deposits.
- The turmoil following the collapse of Silicon Valley Bank continued to spread Monday, with First Republic Bank shares falling about 60% in pre-market trading despite efforts by the US regional lender to reassure investors on its liquidity.
- HSBC Holdings Plc is buying the UK arm of Silicon Valley Bank, the culmination of a frantic weekend where ministers and bankers explored various ways to avert the SVB unit’s collapse.
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks traded mixed with financials hit amid the fallout from the SVB collapse and subsequent failure of Signature Bank, although US equity futures were supported and there was also a gradual improvement in Asia following efforts to stabilise the financial system with bank deposits guaranteed and the Fed announced to make additional funding available to eligible depository institutions to assure that banks have the ability to meet the needs of their depositors. ASX 200 was lower with weakness seen across most industries including the top-weighted financials sector although closed off its lows owing to the resilience in commodity-related stocks and with money market rates pricing in over 75% probability of a pause at next month’s RBA meeting. Nikkei 225 retreated to beneath the 28,000 level with financial stocks dominating the list of worst performers. Hang Seng and Shanghai Comp. were positive with Hong Kong boosted by gains in tech after President Xi advocated strengthening science and technology at the closing remarks of the NPC and with Bilibili boosted following the inclusion of its Z shares to the Stock Connect, while the mainland was also kept afloat after China reported stronger-than-expected loans/financing data and surprisingly retained PBoC Governor Yi Gang as the head of the central bank.
Top Asian News
- China’s parliament officially approved senior government positions with Li Qiang as Premier, while Yi Gang will remain PBoC Governor and Liu Kun will remain Finance Minister, according to Xinhua.
- Chinese President Xi said China should implement a strategy of rejuvenating the country through science and education, while he added that they should work to achieve greater self-reliance, strength in science and technology, as well as promote industrial transformation and upgrading, according to Reuters.
- Chinese Premier Li said China needs to further enhance scientific and technological innovation capabilities, speed up construction of a modern market system and focus on high-quality development. Li said that China will unswervingly deepen reform and opening up, while he noted there are many favourable factors supporting China’s economy but also said that China faces many difficulties this year and that it is not easy to achieve the 2023 growth target of around 5%.
- China’s NBS head Kang Yi said China’s economy still contains deep structural contradictions and problems.
- China reportedly privately suggested that the US consider a simultaneous visit by US VP Harris to China if House Speaker McCarthy decides to go to Taiwan, according to US sources cited by SCMP.
- China’s city of Xi’an in the Shaanxi province revealed an emergency response plan last week that would enable it to shut schools, businesses and “other crowded places” in the event of a severe flu epidemic, according to CNN.
European bourses are under substantial pressure, Euro Stoxx 50 -2.8%, with banking names leading the downside as contagion concern continues, SX7P -5.5%. Action which comes despite US and UK regulators stepping in over the weekend/Monday morning (details above) as concern remains over regional banks such as First Republic and Western Alliance Bank., -62% and -22% in the pre-market respectively. Stateside, futures have been faring comparably better given the backstop measures and strength in large-cap banking names; however, this has since eroded as broader sentiment deteriorated further, ES +0.1%, RTY -0.4%. Specifically, large-cap banking names in the US are now negative; JPM -2.5%, WFC -3.3% & BAC -5.0% in the pre-market.
Top European News
- Germany’s Verdi trade union called for a strike of security personnel at Berlin airport on Monday due to disputes regarding remuneration for working nights, weekends and bank holidays, according to Reuters.
- Riksbank is to begin selling gov’t bonds on 4th April, to take place every calendar month except for July and August.
- Buck loses safe-haven mantle to the Yen, Franc and Gold.
- DXY pivots 104.000, USD/JPY probes 133.00, USD/CHF tests 0.9100 and USD/XAU approaches USD 1900/oz
- Dollar also down vs other majors irrespective of marked risk aversion, albeit off lows
- EUR/USD back below 1.0700, Cable sub-1.2100, AUD/USD under 0.6650 and NZD/USD beneath 0.6200.
- PBoC set USD/CNY mid-point at 6.9375 vs exp. 6.9380 (prev. 6.9655)
- Benchmarks are firmer across the board amid a significant dovish adjustment to expected Central Bank activity.
- Specifically, USTs are firmer by in excess of a full point, though off an earlier 114.29+ peak, with Reuters pricing now having a roughly equal chance of an unchanged announcement in March or a 25bp hike from the Fed.
- Within Europe, Bunds are similarly firmer by over 200 ticks though again off best levels with the associated 10yr yield down to circa. 2.25% vs 2.55% on Friday; pricing for the ECB meeting on Thursday has seen a marked dovish move to a circa. 30% chance of 25bp compared to Lagarde’s guidance for 50bp.
- Commodities have, ex-spot gold, come under marked pressure as risk sentiment deteriorates throughout the European morning.
- Specifically, WTI and Brent front months are lower by over USD 1.50/bbl and below/at USD 75/bbl and USD 81/bbl respectively.
- Base metals are well off best levels, given the risk tone, but are somewhat cushioned by the USD continuing to slip. Action which is assisting spot gold, alongside traditional haven allure, with the yellow metal up to USD 1893/oz at best.
- Saudi Aramco achieved a record USD 161bln profit last year and its CEO Nasser said areas of interest for potential acquisitions include China and India. Aramco’s CEO noted they are looking at major expansions and are looking at the global LNG market for potential opportunities, while he anticipates a healthy demand pick-up in China and India.
- Iran said its oil exports reached the highest level since the reimposition of US sanctions and that they exported 83mln bbls of oil more since 21st March 2022 compared with the same period the prior year, according to Tasnim.
- MMG (MMG AT) announced that transportation of concentrate recommenced on March 11th after the removal of roadblocks and site operations are returning to full capacity at the Las Bambas copper mine in Peru, according to Reuters.
- Indian mining minister says Jammu and Kashmir governments to auction lithium blocks in the states.
- Ukrainian President Zelensky said Russian forces suffered more than 1,100 dead in less than a week of fighting in Bakhmut, eastern Ukraine, according to Reuters.
- Russian Foreign Ministry said Russia’s position on the grain deal remains unchanged and that Russian representatives have not participated in any talks yet regarding extending the grain deal, according to Reuters.
- Iranian Foreign Minister said an initial agreement was reached with the US regarding exchanging prisoners, although a White House official said that Iranian claims of a US-Iran prisoner swap deal are false, according to Reuters.
- South Korea said that North Korea fired missiles from a submarine on Sunday morning and it was also reported that North Korean leader Kim convened a meeting with military leaders about practical war deterrence measures, according to Reuters and KCNA.
- Chinese President Xi is reportedly planning a visit to Moscow as soon as next week, according to Reuters sources.
- Russia’s Kremlin says no comment on possible Moscow visit by Chinese President Xi next week, President Putin’s participation cannot be ruled out.
- Crypto markets have waned off weekend highs with Bitcoin (BTC) dipping back towards USD 22k as global risk sentiment sources.
- Crypto exchange Okcoin says USD-deposit by wire and ACH have been paused; all funds safe; order-book trading not affected; USD-withdrawal not affected.
US Event Calendar
- Nothing scheduled
DB’s Jim Reid concludes the overnight wrap
Where do we start today given the SVB collapse? This is a long note with the overnight news, our thoughts on the overall situation, the week ahead and then reviewing the big swings last week.
To start, it has been a frantic evening of action as the authorities fought to ensure no market meltdown as Asia opened. They have succeeded on this front so far. The latest news is that overnight the Federal Reserve and Treasury announced emergency measures in order to protect the US banking system. The Fed is making it easier for banks to access the Fed’s discount window in order to turn assets that have quickly depreciated due to rising rates into cash without having to take the large losses the Silicon Valley Bank suffered last week. Essentially this would allow banks to obtain liquidity over the next year without selling assets. There are also reportedly discussions to enact extraordinary measures if there is further outflows of uninsured deposits from lenders. The crisis forced the FDIC, Federal Reserve, and Treasury Department to jointly announce that SVB depositors “will have access to all of their money starting Monday”, while signaling that they would act as lender of last resort without bailing out institutions.
Additionally, Signature Bank was shut down by NY state regulators yesterday following large deposit outflows on Friday, and the FDIC announced that they would be marketing Signature Bank to potential bidders. The Treasury Department announced that the bank’s customers will have full access to their deposits on Monday. The bank had total assets of $110.4bn versus $88.6bn of deposits at the end of 2022, making it the third largest bank failure by assets. The company, similar to Silvergate, had measurable exposure to crypto companies.
Overnight in Asia, equities are higher following the interventions. As I type, the Chinese equities are outperforming with the Hang Seng (+2.26%) leading gains followed by the CSI (+0.85%) and the Shanghai Composite. Elsewhere, the KOSPI (+0.27%) is gaining ground while the Nikkei (-1.36%) is bucking the regional positive trend as the yen continues to strengthen against the dollar.
Outside of Asia, US futures tied to the S&P 500 (+1.66%) and NASDAQ 100 (+1.75%) are sharply higher, while yields on the 10yr USTs are fairy stable although 2yr yields are -16bps at 4.43% as we go to print. Terminal has come down another -20bps to 5.07%. So a big steepening with investors reassessing how far the Fed will now go given the news. So a fascinating set up ahead of CPI tomorrow. Elsewhere, the global crypto market has managed to recover with the Bitcoin (+4.33%) trading at $22,422 in Asia trading hours.
A few big picture observations on the whole SVB story now. The first thing to say is that this is why inverted yield curves pretty much always signal bad news ahead. They tend to always signal an eventual unwind of carry trades somewhere in the financial system or economy that were done in previous quarters or years. In my opinion, the yield curve works more through what it does for behaviour of economic agents/investors rather than what it tells you about what the market thinks of the economic environment. Many think that QE had distorted the signal of the yield curve and therefore an inverted yield curve is more sanguine in this cycle. I couldn’t disagree more with this view as I don’t care why the curve inverts, I just care that it does. The rest is a risk aversion / animal spirits trade.
Anyway, last week in fact saw two US financial institutions fail, and now three with Signature overnight. There was a slight shrug of the shoulders over Silvergate folding on Wednesday, given its crypto association, but an almighty storm when Silicon Valley Bank (SVB), the 16th largest US bank by consolidated assets, did the same on Friday. US deposit-taking bank defaults are not that rare but most of these are small institutions. For those under the FDIC, there have been 562 failures since 2001 (490 between 2008-2013, 31 since 2015) but this is the first for three years – the longest gap over this period. Since 2009 only 5% of US bank failures imposed losses on uninsured depositors. However, the average deposit level of these were $0.4bn and maximum $1.5bn, with most FDIC insured. SVB had around $175bn deposits at YE ’22 with the vast majority not qualifying for FDIC insurance (<$250k). In terms of deposit-taking banks this is the second biggest bank failure in history behind Washington Mutual in 2008.
For those not following the story, the simplest explanation of SVB’s demise is that they were super exposed to tech venture capital depositors who had been seeing cash burn as the tech bubble burst, whilst previously having loaded up their balance sheet with positive carry trades into bonds when deposits soared during the tech boom and ultra low rate environment circa 2021. Something always, always breaks when the Fed hikes, and with a deeply inverted curve now, the carry trade came unstuck once there was more demand from depositors to withdraw their cash for 3 reasons. 1) cash burn of tech companies, 2) higher deposit rates elsewhere as rates rose, and 3) the final fears, after the huge security sale mid-week, that the bank was in trouble. So ultimately we saw an irreversible bank run.
To us this is a symptom of a perfect storm of all but one of the problems we’ve felt would eventually hurt markets this year. SVB’s woes are a combination of one of the largest hiking cycles in history, one of the most inverted curves in history, one of the biggest bubbles in tech in history bursting, and the runaway growth of private capital. The one missing ingredient not involved here is a US recession. One can only imagine the contagion this story would bring if we also had a US recession at the same time. We don’t for now. However, it would be hard to say that this boom-bust cycle is deviating too far from the likely script at the moment. That being… too much stimulus -> very high inflation and an asset bubble -> aggressive central bank hikes -> inverted curves -> tighter lending standards/accidents -> recession.
Overnight we have published an update on what SVB means for Private Capital, which follows our bearish 2023 outlook for the sector back in November (see here). The new piece from Luke Templeman (here) suggests the Silicon Valley Bank failure crystallises the serious risks in the private capital industry and shows how a tech-driven contagion can affect broader markets. Within the chartbook, we put the SVB collapse in context of how its key drivers directly impact the private capital and broader technology market. We also show how the large gaps in private fundraising increase the risk for everyone in the vertical (banks, VCs, portfolio companies), how heavily private markets are exposed to the TMT sector, and how dry powder may not truly provide a buffer. Investors in private capital may soon have hard choices to make.
If last week’s excitement wasn’t enough for you, unless you’ve been living on Mars, you’ll be aware that tomorrow sees a pivotal US CPI print (full preview below). Also important will be the ECB meeting on Thursday. In terms of other data, US retail sales (Wednesday), China’s monthly data dump (tomorrow) and various US housing market releases through the week are the highlights. Don’t expect any commentary from the Fed as they are on their pre-FOMC blackout ahead of next Wednesday’s rate decision. It’s fair to say that the US CPI report tomorrow is not only hotly anticipated but will likely be a swing factor in terms of 25 or 50bps from the Fed next week, alongside the fall-out from SVB.
Our economists have issued a preview note here. In brief they think the headline CPI (+0.37% forecast vs. +0.52% previously) and core CPI (+0.36% vs. +0.42%) will both round to 0.4% mom which is where the consensus is. This will translate to headline dropping 0.4pp to 6% YoY and core down a tenth to 5.5% YoY. They discuss how at the component level, there will be much focus on core goods, as recent disinflationary pressures from used cars and trucks wane.
Retails sales and PPI (both Wednesday) will also factor into the Fed’s 25/50bp decision. For retail sales, after a bumper January, February’s data should see some reversal, according to our economists. A dip in unit motor vehicle sales will push headline sales (-1.2% vs. +3.0%) lower, while the expected payback from food services and drinking places as well as nonstore retailers should weigh on sales excluding automobiles (-1.1% vs. +2.3%) and retail control (-0.3% vs. +1.7%). For PPI, headline (+0.5% vs. +0.7% mom) will slightly outpace core (+0.4% vs. +0.5%). Rounding out the main US data, investors will also get an array of housing market indicators including the NAHB housing market index (Wednesday) and housing starts and building permits (Thursday).
Another key event will be the ECB decision on Thursday. The meeting follows upside surprises from recent inflation readings across the bloc as well as generally stronger-than-expected economic performance. Our European economists (full preview here) expect a third consecutive +50bps hike, taking the deposit facility rate to 3.00%, as well as messaging supporting for another +50bps move in May. After that, they see a downshift in June to +25bps, taking the terminal deposit rate to 3.75%. However, they emphasise upside risks to the landing zone of 3.50%-4.00% and do not rule out a terminal above 4%.
Over in the UK, markets will be awaiting the labour market data released tomorrow and the Budget unveiled the next day. For the latter, see a preview from our UK economist here. He expects no large surprises together with a focus on fiscal prudence, with the cost-of-living crisis and public sector services likely the main themes for spending.
In Asia, China’s retail sales and industrial production data tomorrow will be at the forefront of investors’ attention. Current median estimates on Bloomberg are pointing to a strong rebound, with retail sales seen growing 3.5% YTD YoY (vs -0.2% in January) and industrial production forecasted to expand by +2.6% (vs 3.6% in January).
See the day-by-day week ahead at the end for more of the week’s highlights.
Looking back on a monumental last week, on Friday, markets were already roiling from the growing concerns about SVB and its implications, before the US jobs report for February then accelerated the rally in sovereign bonds. The report showed nonfarm payrolls coming in above expectations at 311k (vs. 225k expected), but since average hourly earnings grew by their weakest pace in a year at +0.2% (vs. +0.3% expected), the report wasn’t taken to be as hawkish as the headlines might have suggested at first. In addition, labour force participation rose a tenth to 62.5% (vs. 62.4% expected), a fresh indication that labour supply has been improving, and the unemployment rate ticked up two tenths to 3.6% (vs. 3.4% expected).
On the back of all that, markets March Fed contracts fell -5.6bps to an expected 33bps hike and thus nearer to 25bps again having been around 45bps earlier in the week. Terminal ended the week at 5.285% for the June meeting after being as high as 5.691% for the September meeting on Wednesday after Chair Powell appeared in front of both chambers of Congress and before the SVB news broke. On the week, the terminal rate was down -15.9bps (-23bps Friday), whilst futures are now pricing in -40bps of rate cuts by year-end from the highs.
Off the back of this, 10yr Treasury yields saw their largest move lower since last November, as they fell back -20.5bps on Friday to their lowest level since mid-February at 3.699%. Overall 10yr Treasury yields were down -25.3bps last week. The 2yr yield posted a similar move, coming down -27.0bps last week (-28.4bps on Friday) to their lowest level since early February. Across the pond, 10yr bund yields fell back -20.7bps (-13.5ps on Friday) last week to 2.508%, its lowest point since the first week of the new year. 2yr bunds fell -18.0bps on Friday in its most significant daily down move since July but “only” down -11.7bps on the week.
The S&P 500 was down -4.55% on the week (-1.45% Friday), and is now only just better than unchanged for 2023 (+0.58% YTD). Given the shock to the US banking sector, the KBW bank index was down -16.09% on the week (-4.74% on Friday), which was the worst weekly performance since February 2020. The pain from SVB spread through the sector with BofA down -11.39% (-0.88% Friday), JPM down -6.97% (+2.54% Friday), and Citi down -7.66% (-0.53% Friday) over the course of the week. Europe was caught in the downdraft, leaving the STOXX 600 down -2.26% week-on-week (-1.35% on Friday), whilst the CAC and DAX fell -1.73% (-1.30% on Friday) and -0.97% (-1.31% on Friday) respectively.
With risk markets selling off, credit spreads widened significantly on the week. The Euro Crossover HY CDS index was +29.3bps wider (+29.6bps wider Friday) and EUR IG CDS +6.4bps wider on the week. EUR HY CDS is still -48bps tighter YTD, with EUR IG having tightened -8bps since the start of the year. US credit significantly underperformed as the US HY CDS index spiked +65.5bps wider (+19.7bps Friday) with IG +12.2bps wider (+4.2bps Friday). The weekly widening has left USD HY CDS +14bps wider YTD, while US IG CDS is now +1bps wider YTD.
Cash indices in the US also significantly widened with $HY cash spreads widening +33bps Friday to finish the week +53bps wider at 450bps, while $IG cash spreads were +16bps wider on the week (+9bps Friday) to finish at 136bps. That was the largest widening in $IG cash spreads since the depths of the Covid sell-off in March 2020, while $HY cash spreads widened the most since June 2022.
Silicon Valley Bank bonds sold off sharply on Friday As an example, the price on the 2033 SIVB bonds fell from $88.37 on Wednesday to $42.92 by the close on Friday, having hit a low of $37.40 intraday. The bonds started the week rated BBB by S&P, and were initially downgraded to BBB- on Thursday before the rating was withdrawn on Friday after the regulators stepped in.
Lastly, oil was firmly in the red last week as Brent crude fell back -3.55% (+1.46% on Friday) and WTI by -3.77% (+1.27% on Friday). Gold outperformed on Friday, posting gains of +2.03%, up +0.63% on a week-on-week basis. European natural gas futures were a clear outperformer, rising +21.23% on Friday, its largest move higher since last June, and +17.51% week-on-week as a late winter chill hit parts of Europe and the UK.
Mon, 03/13/2023 – 08:18