Things you need to know –
The Swiss Gov’t pulls off an emergency ‘shotgun wedding’ convincing UBS to take Credit Suisse for some $3.8 billion – Deal came Sunday evening after an anxious weekend – The SNB is providing $100 billion to ‘help facilitate the deal’ while providing another $9 billion to backstop losses that UBS may incur, Credit Suisse – AT1 bondholders get wiped out – threatening to send the $275 billion market for bank funding into a tailspin….equity holders get saved – Fixed Income managers in an uproar as many point out that bondholders have preference over equity holders in the ‘pecking order’…..saying the Swiss have ‘killed this key corner of funding for lenders’ – leaving the global financial community on the edge of their seats. Prices of AT1’s in Asia – getting slammed overnight. Global asset managers trying to assess what exposure – if any – they have to these AT1’s.
AT1’s are Additional Tier 1 securities that absorb losses when the capital of the issuing institution falls below supervisor determined levels. They were created post the GFC, impose principal losses on creditors and ‘in theory’ have no recourse to the public purse should there be a bankruptcy. Buyers of these securities ‘knew the risks’ going in and if you continued to own them on Friday – you also knew the risk of complete loss if CS was taken over…..…but many never expected that risk to be realized – they expected the regulators to ‘save them’….…..so expect lots of screaming and yelling in the days ahead.
Stocks around the world under pressure….Asian markets all ended Monday lower….Hong Kong -2.65%, Nikkei -1.4%, Australia down 1.4%, China – 0.5%.
When European markets opened, they were all down more than 1.5% – banking stocks got whacked….UBS – 12%, Credit Suisse -64%, Deutsche Bank – 9.8%, Commerz Bank – 8%, Barclays -8.4%, UniCredit – 5%, Intessa Sanpaolo – 3.5%, BNP Paribas – 6.8%, Société General -7.2%….you get the picture, right? It should be noted that as the morning sun moves across the sky – European markets and some of the banking stocks outside of Switzerland are in fact rebounding as investors find opportunity….reminding us that in the ‘chaos – there is opportunity’. At 5:30 all markets across the zone are now only lower by about 0.5% and appear to be improving.
US banks listed in Europe all under pressure…as US investors brace for another rocky day in the markets….US futures at 4:30 am were all down across the board – at 4:30 am – Dow futures -350 pts, S&P’s off by 40 pts, the Nasdaq -90, the Russell off 25 pts. – this on top of the losses seen on Friday….when the Dow lost 360 pts, the S&P – 44 pts, the Nasdaq down 88 pts, the Russell down 45 pts and the Transports down 190 pts.
But again – as trading got underway – we have seen the broader tone improve….banking sector though remains under pressure….yet US futures are attempting to rally. At 5:30 am – US futures – while still lower have rallied back significantly. Dow futures now down 90 pts, S&P’s down 7, The Nasdaq down 3 and the Russell down 2. So, expect lots of volatility.
Central bankers around the world are rushing to restore confidence and stability to the system – the FED and 5 other central banks have already announced ‘coordinated action’ to boost liquidity in the US dollar swaps market to help ease the strains on the global financial system. This week’s FED rate decision now front and center – with many now saying that this latest crisis will force the FED do nothing. Something that I don’t think is possible. My gut says that they have to move to convince everyone that their inflation mandate is their first concern….and no move might suggest that the global financial markets can’t handle it.
Fed Funds continue to suggest that the FED will raise rates by 25 bps and attempt to make it clear that inflation remains the FED’s focus….but what happens next will depend on the language he uses and how that message is received…..
As you can imagine – the move into the safety trade is alive and well…..German and UK bonds are higher….US Treasuries prices are higher, sending yields lower….….the 6 month bill is yielding 4.36% (recall that only 2 weeks ago it was yielding near 5.5%), the 2 yr. yield falling 13 bps yielding 3.69% while the 10 yr. is down 11 bps yielding 3.31%….and Gold? Oh, yeah, that surged up and thru $2000/oz – ticking as high as $2031/oz in overnight trading….
MGS’s Mikey Wilson – feeling vindicated tells us that ‘the stress in the banking system marks what’s likely to be a painful and vicious start to the end of the bear market in US stocks.”
He see’s the ‘backstopping’ of risk and bank deposits in the US as a desperate attempt to calm the markets causing many investors to go ‘risk on’ as they see it as a form or QE (quantitative easing) – he on the other hand will argue that it is not at all….and argues that it will kill credit availability squeezing growth out of the US economy saying that
“The S&P will remain unattractive until equity risk premium climbs to as high as 400 bps from the current 230 bps”.
(Equity risk premium is the EXCESS return earned by investors when they invest in the equity market over a risk free rate – think treasuries. The excess return compensates investors for taking on more risk and changes over time as market risk fluctuates. In times of stress – the risk level increases…Capisce?)
Oil – comes under pressure as the global banking crisis unfolds…..Our friends at Goldman – who 2 weeks ago told us that oil was going to $100 barrel now tells us that they only see it going to $94/barrel…..saying that
“Oil prices have plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows. Historically, after such scarring events, positioning and prices recover only gradually…”
The decline in prices forcing the Saudi’s and OPEC to meet in Riyadh to discuss what their response will be as crude prices fall – stressing their commitment to a decision made in October to cut production by 2 million bpd until the end of 2023…- the question now is – Will those production cuts be revised higher? Delegates of the group have said off the record that they are not considering any change until the financial markets settle down – something that investors should take with a ‘grain of salt’. This morning WTI is trading down $1.50 at $65.26 – a level that represented resistance in July 2021 and then support in December 2021…- so this is a key level to watch. A failure to hold here would see oil potentially decline to $60 barrel.
The next official OPEC meeting is April 3rd and word is that they are monitoring the situation very closely to decide what’s next. Remember – The sweet spot for the Saudi’s is $80/barrel….which is a 21% move up from here.
Eco data this week – besides the FOMC meeting – includes Existing Home Sales – expected to be up by 4.8%, m/m, New Home Sales expected to be -3% m/m, S&P Manufacturing PMI of 47 – contractionary territory and S&P Services PMI of 50.2 – slightly expansionary.
The S&P closed at 3916 down 44 pts on Friday…. up 70 pts…..after testing a low of 3901. It feels like a Risk Off day – but we know how that tone can change depending on the headline. Last week saw us attempt to rally and test trendline resistance at 3955 ish….failing to pierce up and through….….This morning’s weakness suggests that we test 3900 – but if the US banking headlines continue to show stress a move lower than that would not be unexpected….We remain in the 3800/4050 trading range….- so there is plenty of room to day trade and there is plenty of room to add to your long term portfolio if you have a strong stomach….remember – it is the chaos that creates the opportunity.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Shrimp Francese
1 ½ pounds large shrimp cleaned, deveined, and butterflied. 4 large eggs beaten, olive oil, butter, minced garlic, flour, ¾ cup dry white wine, chicken stock, 1 large lemon sliced, plus 1 tablespoon lemon juice, s&p, flat-leaf Italian parsley, chopped.
Set up one bowl with the butterflied shrimp, one bowl of flour, and one bowl with the beaten eggs and half of the parsley mixed in.
Heat a large nonstick pan to medium heat. Add of olive oil and ¼ stick of butter.
Dry the shrimp off with paper towels then season the shrimp with s&p. Dredge in flour, shake off the excess, and dip into the egg wash then add to the pan.
Do not crowd the pan. Work in batches If you have to. Use more oil/butter as required for subsequent batches. Fry the shrimp for 1-2 minutes per side, then place on paper towels or a wire rack to drain.
Empty the pan – wipe it down with a paper towel – now add ¼ stick of butter and the garlic, sauté for about 1 min….Next, add 3 tablespoons of flour to the pan and whisk over medium heat until smooth. 1 min….
Add the white wine, turn the heat to high, and bring to a boil for 1 minute while whisking. Next, add the chicken stock and lemon juice and again bring to a boil for 1 minute while whisking. Turn the heat down to medium-low. Taste tests the sauce and adjust s&p if need be.
Add back the shrimp to the pan along with the lemon slices and gently coat the shrimp with the sauce. Heat through for 3-4 minutes while spooning the sauce over the shrimp.
Stir in the remaining parsley before serving. Now you can serve this over white rice, linguine or just garlic bread.
Buon Appetito.
