Mar 24, 2023
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What a difference a few hours makes. Heading into the trading day Friday, risk assets around the world were down sharply while treasury yields plunged on a flight to safety as bank vigilantes set their sights on Deutsche Bank as their next victim. After taking SVB down two weeks ago and Credit Suisse last week, Deutsche Bank seemed like the next logical target as it almost always find itself as key player during issues in the banking sector. Some may have even wondered why it hadn’t been targeted earlier!
Below is one chart from this week’s Bespoke Report that you may find interesting. The most concerning aspect of the treasury market has been intraday volatility. Traditionally, the two-year Treasury has been one of the least volatile areas of financial markets, but over the last month, the average daily move in the two-year yield has been over 17 basis points (bps), exceeding the peak volatility of the financial crisis to the most volatile trading since 1983. These are not the types of moves you would expect to see in a well-functioning market and provide another example of something that’s ‘broken’ in the aftermath of the Fed’s most aggressive tightening cycle in forty years.
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Mar 17, 2023
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Back in September of 2022, we published a Bespoke Report entitled “Hike It ‘Til You Break It” (link). In that report we characterized the Powell Fed as seeming “committed to breaking either the financial system or economy…whichever it can mangle first”. Stocks made their major bear market low about three weeks later, on October 12th. The Fed Funds rate has been raised another 225 bps since that point, while the 2 year yield (a proxy for the Fed Funds rate a year ahead) went up another 90 bps to a peak of 5.07% on March 8th. The result? The Powell Fed absolutely broke something.
During the pandemic, enormous fiscal transfers and Federal Reserve QE of government bonds meant an enormous buildup of deposits in the banking system. Those deposits were created by either issuance of government bonds or by purchases of those bonds, financed by bank reserves which match with deposits. Banks faced with those massive inflows of deposits generally bought government bonds. Unable to invest in riskier securities or grow loans rapidly thanks to macroprudential regulation, banks were forced to buy low credit-risk government bonds.
While those bonds don’t have a credit risk, they do have duration risk. As long as banks aren’t forced to sell them thanks to ample deposits, they do not have to recognize a mark-to-market loss on those holdings. But for banks that are under deposit pressure, things can get out of hand quickly. Concentrated crypto deposits (like at Silvergate or Synchrony) or exposure to specific demographics (like at Silicon Valley Bank or to a lesser extent First Republic) that fled quickly led to stress and ultimately a need to wipe out equity, though for now the total losses remain unclear.
It remains to be seen whether this effort to break the financial system will have a large macro-economic feedback, but the Federal Reserve has certainly at least managed to create collateral damage via interest rate markets that has dominated headlines this week.
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Mar 10, 2023
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Heading into this week, the consensus concern among investors was the “higher for longer” narrative that had been brewing for the past month and whether the Fed would decide to hike rates by either 25 or 50 basis points at its upcoming meeting on March 22nd. Inflation numbers that were cooling in the last quarter of 2022 perked up again in January, and US employment data (data that is being impacted by falling response rates) just won’t cooperate even though we’re seeing big increases in job cut announcements (as we’ll highlight later).
Earlier in the week, markets interpreted Fed Chair Powell’s testimony before Congress as hawkish, causing odds for a 50-basis point hike to spike well above the odds for a 25-basis point hike at the March meeting. On Wednesday, we also got a stronger than expected ADP Employment reading and a stronger than expected JOLTS reading. Both beats kept the 50-basis point hike narrative going ahead of Friday’s all-important nonfarm payrolls number for February.
On Thursday as investors were digesting the weekly jobless claims figures and listening to President Biden’s proposed tax hikes in his new budget, we saw a dramatic drop in the regional bank corner of the market when a West Coast bank known for funding a large portion of Tech and VC start-up businesses – SVB Financial (SIVB) – saw its share price fall more than 50% in early trading. By the end of yesterday, SIVB had lost 66% of its value in one day. By this morning when shares were halted after falling another 60% in pre-market trading, the entire investment world had taken notice, and when later in the day the state of California and the FDIC announced that SVB had gone belly-up, the stronger-than-expected nonfarm payrolls report was but an afterthought. The failure of SVB (formerly Silicon Valley Bank) is the 2nd largest bank failure in US history, and it happened just like that. For the week, the US equity market was down 4.5%, and Treasury bond yields that were hitting cycle highs earlier in the week ended up seeing some of their biggest 2-day declines ever.
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Mar 3, 2023
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If you’re confused, join the club. Sweat is beading up on the foreheads of investors on both sides of the bull-bear debate lately. There are enough bearish headlines out there to make anyone question why in the world they would ever want to own stocks. Meanwhile, just as it seems as though the market is about to break down, Thursday and Friday happen. Seems to us like the market is doing its job!
In honor of Dr. Seuss’ 119th birthday this week, we thought it would be fun to write a description of the stock market channeling his writing style. With a tool like ChatGPT, we figured it would be easy enough. Unfortunately, the results were lacking, so in the spirit of Napolean Bonaparte who once said, “If you want a thing done well, do it yourself,” we did just that. We’ll let you judge for yourself if it was done ‘well’! But if you’re short on time this weekend, the story will tell you all you need to know about the stock market.
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Feb 24, 2023
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It was another busy data week with Friday’s personal consumption expenditures inflation data delivering another painfully high reading. Earnings also wrapped up after a busy six weeks of results. We discuss index performance in the US, Asia, and Europe, dive deep into earnings results, break down movements in the dollar, discuss shifts in interest rates, and break down all the major data releases this week in the context of the hawkish Federal Reserve.
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Feb 17, 2023
This week’s Bespoke Report newsletter is now available for members.
In this week’s newsletter, we’ve updated our Equity Market Risk Gauge for the month of February, and we also take a look at market technicals, healthy earnings, crazy inflation stats, interest rate movements, and what’s on tap for the coming weeks.
To see our updated Equity Risk Gauge and access everything else Bespoke’s research platform has to offer, join Bespoke Institutional and get half off for the first three months!
