Stocks had a mixed close yesterday as investors tried to make sense of 2 bank closures and backstopping Treasury Department. A plummet in treasury yields was the most since the early 1980s – does this ring a bell?
What’s in – where is your wallet? It’s hard to describe the financial markets yesterday. I wanted to start with topsy turvy, but alas, I think that is too benign, the word even implying that it was zany, or fun. It was neither. Crazy, perhaps? No, there was actually a sense of order to the whole thing. Any stock that had the word “bank” in its name, even companies that owned banks… yes, even if a company was a financial company, it was punished yesterday. As things unfolded with SVB, the reasons for its demise became clear. Smart investors searched through their portfolios and even the whole financial sector for bank stocks that may have similar profiles in how they manage their reserves. Regardless of SVB’s mismanagement of its reserves, it was ultimately a bank run on deposits that brought the bank to its knees and relegated it to the history books – a lesson to be taught to future MBA students – “don’t do this.”
Beyond the beaten-down financials sector, there was a bigger theme being played out in the markets. The high-profile failure of 2 banks combined with a third quickly unraveling one was an eye opener. Side note – Moody’s placed 6 banks, including that quickly unraveling one on a downgrade watchlist overnight. The eye opener for the market as a whole was that, perhaps, the Fed had finally pushed the US economy to the brink. Remember, the whole idea of rate hikes is to impede growth, not to help it. Even if monetary conditions are tightened slowly, ultimately, something will break. In this case the Fed has been raising rates with what appears to be malice. In its defense, inflation is clearly still a problem – we will learn just how much later this morning. In any case, the Fed has a history of raising rates until something breaks. It could be the housing market, the services sector, a downgrade of sovereign debt, or… the banking sector. To be clear, the banking sector as a whole, did not break down, but these past few days have exposed a weakness in the sector that could be a warning signal if it is not attended to quickly. Sure, more after-the-fact regulation, typical of lawmakers, may help… next time we are in this situation, but for now, the market seems to believe that the Fed should stop mashing on the brakes.
That could be seen readily as yields plummeted yesterday in epic fashion. Most notable was the 2-year Treasury Note, whose yields fell by more than ½ of a percentage point. If you know Treasuries, you know that a move like that, -60 basis points to be exact, is HUUUUUGE for a 2-year tenor. Beyond that flamboyant hyperbole, the move simply reflected the market adjusting to where it believed overnight rates would be in the future. Essentially, -75 basis points lower than where we are today on Fed Funds. You may recall that just a few short days ago, there was strong possibility of the Fed hiking the Funds rate by +50 basis points at its next meeting. Yesterday morning, there was a low probability of even a ¼ percentage point move next week. That has since adjusted a bit. There is now a 73% chance of a +25 basis-point move with a slim 28% chance of another +25 basis-point hike in May. According to futures and Overnight Index Swaps, 2023 will end up with a Fed Funds rate of around 4.25%. That is -50 basis points below the current level.
Later this morning we will get the Consumer Price Index / CPI, which is expected to show a +6.0% increase over last year with a +0.4% monthly change. Still growing, but less than last month. This morning’s print will rise to the top of the list of market drivers, especially if inflation comes in hotter than expected. Regardless of CPI, the newly exposed weakness in the banking sector will certainly collar the next few moves by the Fed. By just how much… we will have to wait and see. The markets are certainly attempting to figure that out as yields continue to adjust with wild swings. I think I arrived at the right word to describe the current market. I am going to go with fluid.
WHAT’S SHAKIN’
First Republic Bank / CA (FRC) shares are higher by +40.98% in the premarket as speculators jump in to take advantage of yesterday’s -62% rout. The company was put on a downgrade watchlist by Moody’s overnight, along with Western Alliance Bancorp, Intrust Financial Corp, Zions Bancorp, and Comerica Inc. Dividend yield: 3.46%. Potential average analyst target upside: +350.6%. WHY IS THIS SO HIGH considering the company’s situation? This number is simply the difference between the stock’s price and the average 12-month price targets of Wall Street analysts. It is in no way a recommendation and it does not mean that the stock will actually achieve the targets. Analysts are likely to revise their targets in response to current events.
United Airlines Holdings Inc (UAL) shares are lower by -4.61% in the premarket after it lowered Q1 guidance. The company now expects a loss after prior guidance included profitability for the quarter. The announcement marks a setback after analysts have been increasingly positive of the company’s prospects. The lower guidance is the result of a new employment agreement with pilots and may reflect a temporary setback. The company is due to announce earnings on April 20th. Potential average analyst target upside: +26.0%.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday as traders attempted to factor in the events of recent days. The S&P500 slipped by -0.15%, the Dow Jones Industrial Average fell by -0.28%, the Nasdaq Composite Index gained +0.45%, and the Russell 2000 Index dropped by -1.60%. Bonds gained and 10-year Treasury Note yields fell by -12 basis points to 3.57%. Cryptos rallied by +17.79% and Bitcoin gained +12.76%.
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