Stocks managed to close in the green after a raucous day of trade which was largely dictated by bank sector jitters. Bond yields dropped precipitously in recent days as bond traders enter their votes for the Fed’s future exploits.
Dammit Janet! I love you. Ok, ok, I am a happily married man, and I simply stole a line from Rocky Horror Picture Show. I toyed with using just “Dammit Janet” on Wednesday after Treasury Secretary Janet Yellen crushed hopes… and the market, by seemingly backpedaling on what was thought to be an “anything it takes” strategy to backstop banks. But something told me deep inside that she would rethink her wording and somehow manage to rectify the situation, so I held off using “he said, she said,” instead. Now remember, a lot of this current bank situation was kicked off by a run on bank deposits. Depositors feared that some struggling banks might end up shuttering, so they pulled deposits leaving the banks no alternative but to sell deeply underwater bonds which, if held to maturity, would have been fine, but they weren’t, so things were… um, not fine. Yes, it is true that the banks mismanaged risk and for some strange reason (maybe they weren’t reading my daily note on the regular), some banks were not expecting the Fed to raise rates causing bonds to tank in market value. They were surely aware of the decay in the value of the reserves, leaving them biting their nails and hoping that depositors remained calm. Biting and hoping… bankers.
Well, in the case of SVB, which catered to the Silicon Valley startup community, they were in a tight spot. With the flow of new venture investments dwindling to a trickle, cash flow-burning startups, unicorns, and decacorns were relying on their bank deposits to keep the lights on, and with no new money to replenish it, their deposits shrunk, and shrunk… and shrunk. Lending in the inverted yield curve environment made life that much more difficult for the bank, leaving it on shaky financial ground. SVB was in a tight spot, and it tried desperately to stay liquid. The bank attempted to raise cash through a stock offering while admitting a huge loss in its bond portfolio. It was a clear warning sign. When a prominent venture capitalist publicly told its portfolio companies to withdraw their cash, it was just a matter of time before the doors were locked. That started the hunt by investors for the next SVB, and it turns out that there were a few banks that similarly mismanaged their reserves. Signature Bank / NY became the next victim of a bank run which was driven by its real estate investor clients. Once again, the closures were due to bank runs, driven by fear, which exposed weaknesses in this small handful of banks.
In order to prevent the fear from spreading, the Treasury and the Fed stepped in to ease the anxiety of depositors. The feds would backstop any non-insured depositors at the struggling banks. The moves temporarily eased fears, heading off a systemic bank run. But the nerves of investors were not soothed and volatility amongst bank stocks and the financial sector as a whole, have been volatile ever since. Rather than let things settle, political pressure led Jerome Powell and Janet Yellen to water down the understood backstop commitment on Wednesday, reopening wounds and causing a selloff… and ensuring that volatility in the financial sector would continue. Yellen made sure to smith her words carefully in her testimony on Capitol Hill yesterday, walking back her prior day’s back walk. This sent stocks higher… after they had fallen from morning highs, relieving some fears… and leading me to add the “I love you” to today’s tagline. When it comes to banks in crisis mode, fear management is the feds’ primary role, and ambiguity does not help. In reality, the markets have not yet digested the banking debacle of the past few weeks. The Fed’s Wednesday hike, though largely expected, did not help the situation either. It would serve to put further pressure on the already pressured banks. Since then, bond markets have quickly adjusted to factor in rate cuts later in the year. Why would the Fed lower rates later this year after just hiking rates 2 days ago? That would only be necessary if the economy… or the banking sector showed signs of unraveling. If the bond market is correct, and it usually is, volatility in the bank sector, and stocks in general, will continue, until the Fed pivots.
WHAT’S SHAKIN’ THIS MORNIN’
There are no clear winners or losers in the premarket. Bank sector stocks like First Republic, Citigroup, Fifth Third, and Truist are all lower as bank jitters continue. Energy sector names like Marathon Oil, Devon Energy, Halliburton, Schlumberger, Exxonmobil, and Occidental Petroleum are lower as crude oil prices slipped below $70 / barrel (WTI futures are around $67.25 at the moment).
Bond traders are sending Treasury yields lower this morning. 10-year and 2-year tenors are both significantly lower and the yield curve continues to steepen (less inverted) as traders place bets on late-year rate cuts.
YESTERDAY’S MARKETS
It was relief, fear, and then relief that drove equities higher, lower, than higher yesterday as the financial sector dominated the broader markets. The S&P500 gained +0.30%, the Dow Jones Industrial Average climbed by +0.23%, the Nasdaq Composite Index rose by +1.01%, and the Russell 2000 Index declined by -0.41%. Bonds gained and 10-year Treasury Note yields were unchanged at 3.42%. Cryptos climbed by +5.53% and Bitcoin gained +3.43%.
NEXT UP