Mar 14, 2023
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“History is largely a history of inflation, usually inflations engineered by governments for the gain of governments.” – Friedrich August von Hayek
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Futures have been rallying this morning as bond yields move higher as investors breathe a sigh of relief due to the fact that there were no additional bank blowups overnight. Regional banks are seeing the most strength as a stock like First Republic (FRC) is up over 60% in the pre-market. That’s great if you bought the stock yesterday, but it’s still down sharply from where it closed last Friday, let alone where it was coming into the year.
The big number of the morning is obviously the February CPI and that reading came in right in line with forecasts at the headline level (0.4%). Ex Food and Energy, the reading was 0.5% which was slightly higher than expected (0.4%). On a y/y basis, both headline (6.0%) and core (5.5%) were right in line with forecasts. Markets were worried about another hot reading, so the immediate reaction has been a modest bounce in equity futures.
While the moves have been the most pronounced in the Treasury market and regional banks stocks, volatility and extreme reversals have been showing up all over global financial markets in the last several days. Take the equity market of Japan. Last week, the TOPIX finally broke above multi-month resistance to new 52-week highs on Thursday. From a technical standpoint, the action looked like a textbook breakout with well-defined support at former resistance near the 2,000 level. That was Thursday.
In the three days that followed, the TOPX has been down at least 1.5% every day for a total decline of 6%. And that support around the 2,000 level? It was more like Swiss cheese. In last night’s trading, the TOPIX also sliced right through its 50-day moving average (DMA) although it did find some support at the 200-DMA.
Going all the way back to the mid-1980s, the last four trading days for the TOPIX represent just the second time that the index hit a 52-week high and then followed that up with three straight declines of at least 1%. The other period was in October 2003 when the TOPIX hit a 52-week high on 10/20 and then followed that high up with daily declines of 1.1%, 1.8%, and 5.3%, respectively for a total decline of 8.8%. During that correction, the TOPIX’s total decline from that 52-week high pullback was 14.5% before the index went on to recover and resume its upward trend.
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Mar 13, 2023
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“The fundamentals of America’s economy are strong.” – John McCain 4/17/08
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Phrases like the seven words above never seem to be made when markets and the economy are running smoothly, and we’ve heard a number of similar phrases like this made by officials over the weekend and this morning. That’s definitely not to say that the events of the last week and today are a repeat of 2008, but these types of comments almost never have their intended purpose of providing comfort to investors.
What’s happened over the weekend has been notable and will have both intended and unintended ramifications down the line. With deposits at US banks having essentially been backstopped by the actions of the Federal Government, one could argue that the banking system has been de facto nationalized, and the consequences of that are completely unknown, so we won’t even begin to speculate.
The flight to safety has been incredibly pronounced in the Treasury market as the 2-year yield is down nearly 50 basis points (bps) this morning after falling 29 bps on Friday and 20 bps Thursday. What’s truly remarkable about these declines is that they came just after the 2-year yield topped 5% for the first time since June 2007. Going all the way back to 1977, the last time the 2-year yield dropped more than this in a three-day span was just after the 1987 crash, and then before that, it happened in multiple periods from late 1979 through early 1983.
Finally, despite little direct connection between what’s going on with SVB and other US regional banks, European bank stocks have also seen sharp declines in the last two days as the STOXX 600 Bank Index is down over 9%. Analysts are out defending the banks as having ‘limited risk’. That may be true with regards to SVB and other regional US banks specifically, but European banks aren’t immune to the overall trend impacting US banks (a rapid surge in interest rates shortly after central bank officials were assuring markets that any increase in rates would be gradual).
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Mar 10, 2023
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“I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson
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Futures are lower this morning heading into the 8:30 Non-Farm Payrolls report but given the action in SVB Financial (SIVB) which is trading down over 60% for the second straight day, the biggest surprise may be that futures aren’t even lower.
The February Non-Farm Payrolls report was just released and while it was mixed relative to expectations, it was generally positive for markets. Economists were expecting the headline reading to come in at 225K this morning, but the actual reading came in at 311K. Below the surface, though, the Unemployment rate was higher than expected, average hourly earnings were lower than expected, and average weekly hours were also lower than expected.
Yesterday was one of the worst days for bank stocks in years. In the 17 years that the S&P Regional Banking ETF (KRE) has been trading, Thursday’s 8.11% plunge was only the 22nd single-day decline of 7.5% or more, and it was the first since the COVID shock in early 2020. Before that, you have to go back to the debt limit and US credit rating downgrade of August 2011 to find the next occurrence when there was one day (8/8/11) when the ETF fell just under 10%. During the Financial Crisis, moves like yesterday’s almost seemed common. Whether yesterday was a one-day shock in the bank stocks or not remains to be seen, but based on the history of prior occurrences, like cockroaches, more often than not, when there’s one single-day large decline, others are usually lurking.
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Mar 9, 2023
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“A minute’s success pays the failure of years.” – Robert Browning
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It’s been a relatively quiet morning in the markets today, but the bias had been negative as stocks in Europe are down about half of a percent. Economic data just released here in the US, though, showed that jobless claims came in above expectations with initial claims topping 200K and continuing claims topping 1.7 million. Both of these readings are the highest since December. In response to the weaker employment readings, futures have been rallying. Investors and the Fed may like this data, but you can bet that Senator Warren won’t be very happy. There’s no other data on the calendar today, so now the focus will shift to tomorrow’s February Non-Farm Payrolls.
It’s hard to believe it was 14 years ago when the S&P 500 finally made its financial crisis low setting the stage for a new bull market. Things weren’t looking good for the market or the global economy back then, but from the close on March 9, 2009, through yesterday (3/8/23), the S&P 500 rallied 490% which works out to an annualized return of 13.5%- without even including dividends!
Obviously, returns will look remarkable when you measure them from the absolute low, but what may be even more notable is to look at how an investor would have fared had they gone ‘all-in’ at the highs in October 2007 right before all hell broke loose.
The chart below shows the performance of the S&P 500 from its high on 10/9/07 through yesterday (3/8/23). Just over a year after that investment, you would have been down 50% on your way to a total decline of 57% but had you held on through those lows, your total gain since 10/9/07 would have been 155% which works out to 6.3% annualized and again, not including dividends. That’s obviously a lot less than the 13.5% annualized return you would have had from the lows in March 2009, but 6.3% still beats the level of yield you can currently get from any point on the US Treasury yield curve. The key word here is currently.
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Mar 8, 2023
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“Impossible is not a fact. It’s an opinion.” – Muhammad Ali
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After modest gains overnight and earlier this morning, futures have slipped modestly into the red following yesterday’s Powell-induced decline. While past declines in response to Powell’s comments have sometimes been justified due to seemingly abrupt changes in policy, moving targets, and/or inconsistencies in his remarks, yesterday’s testimony in front of the Senate contained essentially nothing Fed officials haven’t been saying for the last several weeks, so either the markets didn’t believe what they were hearing for the last month or yesterday was an overreaction.
Markets in Europe are modestly lower at the moment in a follow-through from yesterday and more hawkish commentary from an ECB official who noted that the bank will continue hiking rates for a period of time after the March meeting. These comments came as Q4 GDP was weaker than expected, and German Retail Sales unexpectedly declined.
Speaking of Europe, while its economy has been lagging behind the US, stocks in the region have continued their recent outperformance of stocks here in the US. The first chart below shows the performance of the FTSE Europe ETF (VGK). After a sharp rally off its October lows, VGK has been in a sideways range for most of 2023 but has still managed to trade within a close range of its 52-week high. After yesterday’s decline, in fact, VGK was just 7% from a 52-week high.
US stocks, meanwhile, have been much weaker. While the rally in VGK took it back near its highs from last Spring, the rally in the S&P 500 ETF (SPY) barely even took it back above its December highs let alone the peaks from August and April. After yesterday’s decline, SPY was twice as far below its 52-week high (-14%) as VGK.
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Mar 7, 2023
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“Observation is a dying art.” – Stanley Kubrick
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It’s been a wild ride for natural gas over the last two trading days. After an 8% rally Friday, natural gas plunged more than 14% on Monday for its largest one-day decline since June 30th and its 15th worst day since 1990. 2023 is barely more than two months old, but yesterday’s decline was the 5th time this year that natural gas had a single-day move (up or down) of 10%+, and that follows last year when there were a record 18 daily 10%+ moves. If the pace of volatility that natural gas has seen so far this year were to continue for the remainder of the year, there would be 28 single-day moves of 10%+. For some perspective, before last year there were just three years (1996, 2001, and 2009) where natural gas experienced ten or more single-day moves of 10%+.
The record volatility of natural gas can be further illustrated by looking at the commodity’s average daily move over a rolling 200-trading day period. Before 2022, the average daily percentage move in natural gas prices never exceeded 3.8% and from 2012 right up until COVID, the average daily move never exceeded 2.6%. Covid and the war in Ukraine changed all that, and nowadays, on any given day, a daily move of 4.6% in natural gas has become the norm as this degree of volatility in the commodity has never been experienced before.
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