Things you need to know –
– EU and UK regulators make clear that Shareholders are the first to lose in the event of failure – but the Swiss are not EU or UK members….
– AT1’s settles down in the UK and EU but remain under pressure in Switzerland.
– The FED – what’s next? 0 bps, 25 bps or 50 bps? And what is the message that each one sends?
– Oil bounces off the lows as the turmoil subsides and OPEC makes noise.
– Treasury prices decline as money moves back into equities.
– Try the Simple Pot Roast
Stocks rallied??? Yes, they did….right out of the gate…..going from deeply negative overnight Sunday to positive right before the opening – only to continue to push higher as the morning turned to afternoon…..by the end of the day – the Dow gained 385 pts or 1.2%, the S&P up 35 pts or 0.9% , the Nasdaq ahead by 45 pts or 0.4%, the Russell gained 20 pts or 1.1% and the Transports ended the day lower by 9 pts or 0.06%.
The weekend wedding of the two biggest Swiss banks caused concern for banks across the Eurozone….and it whacked the whole sector in early trading….Banks from all the different countries under pressure, Swiss, German, French, Italian, Spanish, US even banks from countries you never heard of saw pressure on equity. The idea that this latest crisis would stall any further rate cuts by both the ECB and the FED…was the narrative yesterday….and that sent stocks UP and bonds DOWN……
In addition -the issue I brought up yesterday – the AT1 Credit Suisse bonds that are (were) about to be wiped out only added to the early morning angst for banking stocks. Confusion over who wins and who loses (bondholders vs. equity holders) was the issue…..and traditionally bondholders rank above shareholders in the capital structure…..so these bondholders were ‘caught off guard’ by the decision that was made during these negotiations…. – but Credit Suisse bonds were outliers from the beginning….because Switzerland lies outside of Eurozone regulators….but that did not stop Eurozone regulators from opining on the subject saying that
“Common equity instruments are the first ones to absorb losses, and only after their full use would additional Tier 1 (AT1) be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of European banking regulators in crisis interventions”
So this sounds like we are setting up for a fight – as I pointed out yesterday….this was not going to go down easily – so while everybody knew the risk – now they don’t want the risk and want to be protected. Protected meaning – they come second in line….bondholders first, AT1 bondholders next and then equity shareholders last….. But to be clear – buyers of these bonds were ALWAYS risking the chance (however small it was) that the instruments would become worthless or written down to a fraction of their value.
Now, all this does is raise questions about Switzerland’s financial regulator – causing many to reconsider investing in any Swiss AT1 bonds…Just a note- the majority of the bonds are held by insurers and pension funds and can be sold to individuals outside of Europe via investment funds. They can also be sold to Europeans via an int’l fund. But in the end – expect lots of lawsuits over this…so at least the lawyers will remain fully employed.
In addition investors/traders and algo’s here in the US are making bets that the worst of the banking crisis is over….or may at least be easing……and the shorts that got placed last week – decided that maybe they were wrong, maybe the market found stability, maybe the FED won’t raise rates (and that would be seen as a positive by some) ….and so they ran for cover – which turns them into buyers…..only fueling the move up….
Regional banks – which have been the hardest hit rebounding from the big losses seen over the past 2 weeks…..as they all shored up their deposit bases post the SVB collapse…..The KRE – S&P Regional Bank ETF rose by 0.3%, while the BKX – the KBW Bank Index along with the XLF – the S&P financials ETF rose about 0.7%. Recall that both the KRE and BKX plunged more than 28% and the XLF plunged by 15% after SIVB announced that fateful $1.8 billion loss on their completely unprotected, unhedged, inappropriate bond portfolio back on March 2nd….. a portfolio that was overseen by apparently NO ONE – including the very regulators that exist to oversee the banking industry…. the only bank not participating on the upside yesterday was First Republic – which lost another 47% on top of the losses seen last week….
Just to put this in perspective – FRC traded at $221 in December 2021…. yesterday it closed at $12.14…. a dramatic move and one that screams opportunity???? Or is it disaster? Ask any shareholder and I am almost certain that it was a disastrous opportunity…. but is that because the flamethrowers (VC’s) lit the place on fire or because there were real issues? My gut say – they lit the place on fire – so I say – rip open all of their trading accounts…Every last one….husbands, wives, children, parents, aunts, uncles, nieces and nephews… Every last one….because the speed at which this whole thing unraveled is mind blowing….and feels just a bit chaotic and disconnected….Why? Because what really changed from one day to the next….nearly every bank (and by the way insurance companies) have bond portfolio’s that are under water – but any risk management committee at these institutions – understand hedging that risk and taking on risk appropriate portfolios….They also understand their customer base and assess the possibility of needing cash on hand…..but when the ‘flamethrowers’ light the place on fire – NOT one bank would have enough cash on hand….NOT ONE…..and the fact that you can use your iPhone to log in and move money in the blink of an eye – only exacerbated the issue…..but hey – It is 2023…..Technology is a wonderful thing….!
OK – there was NO eco data yesterday – so the focus was squarely on the banks and on speculation around what the FED would discuss on Tuesday and announce on Wednesday….As of yesterday – futures continue to point to a 73% chance of a 25 bp rate hike ….while 27% are in the ‘No Hike’ camp…..Now, you know me….I am a 73%er…..but the market action that saw stocks rally is suggesting that the 73%ers are in the wrong camp….. – so the next 48 hours are critical …..as investors wage their bets….Look – if the FED pauses – then it pauses – a pause is NOT a pivot, it’s a pause…It does not mean anything other than they are being more cautious at a time of high anxiety…and I think that happens at the next meeting…..not this one….a 25 bp hike would get us to 4.75% – 5% – a level that he has made very clear was the bogey.
Look – JJ and his team have a tough decision to make….do they work hard to kill inflation, or do they worry about any spillover effect (contagion) that a rate hike ‘might’ cause for the ongoing banking turmoil? Should they take a ‘time out’ or should they keep going? Is there an issue with taking the time out? Would it send the wrong message or would investors appreciate that move. Look – no one can say that the FED has been secretive on these moves at all….they have telegraphed EVERY move, they have given fair warning, they have made it clear where they were going….the FED has not tightened abruptly… …But like I pointed out – it will be all about the messaging, how they frame it and how confident JJ sounds….and if he can convince investors (and the media) that a rate hike either was or was not the right decision…Recall – that it was only three weeks ago that JJ was entertaining a 50 bp hike…….remember that? And then the brain trust at SVB appeared on the scene…..
Ok – eco data today includes the Philly Fed Non-Manufacturing Survey – and Existing Home Sales – which are now expected to be up 5% m/m. Now, I do not expect either of these data points to change the narrative about what the FED should or shouldn’t do….In the end – my money says we will get a 25 bp hike and then listen to JJ tell us that the banking crisis is now under control, that the gov’t has essentially backstopped every depositor (for now) at every bank in the country and that his mandate is about restoring price stability….I also expect him to say that he remains ‘data dependent’ so the May FOMC meeting (6 weeks away) could yield a different result…and that is how he will manage to try and calm the markets. Now the question is – Will that calm the markets?
This morning US futures continue to move up….at 6:15 am – Dow futures are up 225, the S&P’s up 23, the Nasdaq up 35 and the Russell up 23 pts. News that JPM CEO Jamie Dimon is heading up a group to advise First Republic on strategic alternatives isn’t helping the overall sentiment by FRC investors….The stock continues to get hammered – but the buyers are not deterred. This morning FRC is quoted up by 20%, KRE is quoted up 3% and XLF is quoted up 2%. Bloomberg is reporting that the US gov’t is ‘exploring ways to temporarily expand FDIC coverage for all deposits’ which I think is funny, because they already did that by backstopping all depositors at SVB, SBNY and FRC….
Oil is up today after being up yesterday as well….Over the past 2 weeks we have seen oil come under pressure – as the banking crisis unfolded – trading down from a high of $80 to a low of $64.30 with some calling for $60 oil in a matter of hours…but that is not the case this morning…. Markets have calmed down, the banking turmoil appearing to ease, and OPEC has started making noise about oil prices…. (Unhappy where they are…) We are also due to get inventory reports today from the API (American Petroleum Institute) and they are expected to show a decline in inventories.. This morning – oil is trading at $68.60 (up 6% off of the most recent low) as it attempts to stabilize and trade higher. We have 12% to go before we hit the trendline at $76.60 before we hit any resistance. Recall that the next official OPEC+ meeting is on April 3rd.
Gold – which traded up to $2031 over the past couple of days due to the banking anxiety is backing off as sentiment changes and calms down…This morning – gold is down $12 at $1988/oz….but any more concern in the banking sector will see investors plow back into gold as a safety trade….Could a FED move cause that concern? We are about to find out.
And treasuries prices decline sending yields up as the anxiety subsides…. the 2 yr. yield now at 4.05% (up from 3.8%) and the 10 yr. is at 3.52% (up from 3.36%) only days ago.
European markets are up across the board….Italy in the lead – up 2.45% with the UK taking up the rear at +1.3%. Again, the rally being credited to declining banking turmoil. The banking sector which got pummeled yesterday is in the lead today after EU and UK regulators told us that they would maintain the proper and established order of ‘equity instruments’ (shareholders) being the first to lose everything in the event of a failure…. Remember – Switzerland is NOT part of the EU or the UK, so those comments do not reflect Swiss regulators.
The S&P closed at 3951 up 35 pts…. It was a Risk ON day…. that was driven by the tone of the headlines….and the apparent shift in understanding of those AT1’s that concerned markets yesterday morning. Last week saw us attempt to rally and test trendline resistance at 3955 ish and last night’s closing leaves us snuggling right up to that trendline…..Futures this morning…suggest that not only will be push up and thru but that we are setting up to test 4010 which is the 50 dma and if we succeed piercing that – then the March high of 4078 is the bullseye……
Much will depend on investor reaction to the FED – in the end will we celebrate a hike in rates or not? If we do not like what we hear – then a retest of 3800 is in the cards….and if we are ok with it – then a push up and through 4078 would happen very quickly.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Simple Pot Roast
This is one of those simple ‘one pan’ meals that takes little time to prepare and cooks beautifully in the oven.
For this you need: 1 -31/2 lb. boneless chuck-eye roast, vegetable oil, 1 large white onion- chopped, 2 large carrots chopped, 2 celery ribs chopped, 3 lg cloves of garlic- put thru the garlic press, sugar, chicken and beef broth, fresh thyme, water and ¼ c of red wine. You also need a pot that can go from the stove into the oven with a lid.
Begin by turning your oven on to 300 degrees. Make room in the center rack.
Pat the roast dry with paper towels and season generously with s&p.
Heat the pot with the oil until it shimmers. Brown the roast on all sides. – 10 mins. Now transfer to a plate and set aside.
Reduce the heat to medium – add the chopped onion, celery and carrots. Sauté for about 10 mins. Now add the garlic and 2 tsp of sugar- stir to mix…. Now add in 1 c each of the chicken broth and the beef broth and the twig of thyme. Return the roast to the pot and any of the juice it produced. Now add enough water to come halfway up the sides of the roast.
Turn the heat up until it boils then cover the pot with tin foil and then put the lid on top to secure it – transfer to the oven. Turn the roast every 30 mins until fork tender – maybe 3 ½ – 4 hrs.
Now remove the roast and put on a plate and cover with tin foil. Let the liquid in the pot cool for 5mins. Now skim the fat off the top and toss away the sprig of thyme. Bring to a boil to reduce by half. – Now add in ¼ c of red wine – boil again for about 2 mins to allow the alcohol to burn off. Season with s&p to taste.
Slice the meat, transfer to a warm serving platter and pour ½ c of juice over it. Serve immediately.
Buon Appetito.
