Friday, March 24, 2023

Markets fall on more banking sector concerns

Dow declined 205, decliners over advancers better than 2-1 & NAZ was off 107.  The MLP index fell 1+ to 209 & the REIT index added 1+ to the 346s.  Junk bond funds were mixed & Treasuries saw more buying which lowered yields (more below).  Oil fell 1+ to the 68s & gold hardly budged at 1995.

AMJ (Alerian MLP Index tracking fund)


 

 




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Federal Reserve Chair Jerome Powell's favorite bond market gauge is signaling that a recession is in the cards for the US economy this year & that interest rate cuts may be on the horizon.  The spread between the yield on 3-month Treasury bills & their expected yield in 18 months fell 134 basis points, the steepest inversion since 2001, about 2 months before the economy entered a recession.  Yield curve inversions are viewed as a good recession predictor because they suggest that investors believe, with the interest rate on long-term bonds lower than the rate on short-term bonds, economic growth is slowing.   Every recession in the past 60 years was preceded by an inverted yield curve, according to research from the Federal Reserve Bank of San Francisco.  "Frankly, there's good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve," Powell said in Mar 2022.  "That's really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it's inverted, that means the Fed's going to cut, which means the economy is weak."  Fed officials are in the midst of the most aggressive tightening campaign since the 1980s, raising interest rates 9 consecutive times as they try to crush inflation still running about 3 times higher than the pre-pandemic average.  The inversion came just one day after the Fed delivered another qtr-percentage point rate hike, lifting the benchmark funds rate to 4.75-5.00%, the highest since 2007.  Economic projections released after the meeting show that officials anticipate just one more rate hike this year & that cuts could be on the table in 2024.  However, many investors are skeptical & believe that lagging economic growth could force the Fed to reduce rates before next year.  The probability that the Fed cuts rates in Jul rose to 79% yesterday, according to the CME Group's FedWatch tool, which tracks trading.  Steeper interest rates, combined with turmoil within the banking sector, have drastically raised the bets of a recession this year.

Powell's favorite bond market gauge flashes recession warning

Treasury yields fell as investors considered what the Federal Reserve's interest rate policy expectations could mean for the economy.  A slide in Deutsche Bank shares also renewed concerns over the state of the global banking system & made Treasuries more appealing.  The yield on the 10-year Treasury was down by 3 basis points to 3.374% & the 2-year Treasury yield was at 3.752% after falling by 5 basis points.  Yields & prices move in opposite directions & one basis point equals 0.01%.  The move comes after Deutsche Bank's credit default swaps jumped, though without an apparent catalyst, sending the stock down sharply.  The move appeared to raise concerns once again over the health of the European banking industry.  Earlier this month, Swiss regulators forced a UBS acquisition of rival Credit Suisse.  ECB Pres Christine Lagarde made reassuring comments, saying euro zone banks are resilient with strong capital & liquidity positions.  Lagarde also said the ECB could provide liquidity if needed.  Following the Fed's latest policy meeting, its chair Jerome Powell noted that the banking crisis played a role in the central bank’s decisions.  On Wed, it announced a 25 basis point increase of interest rates & indicated that its rate-hiking campaign could be paused soon, although its battle with inflation continues.  Many investors have long been hoping for a pause in rate hikes as concerns about whether the Fed hiking interest rates & keeping them elevated for longer would drag the US economy into a recession.  St Louis Federal Reserve Pres James Bullard said that central bank policy should help contain cracks in the financial system.

Treasury yields fall as concerns over global banking system grow once again

European leaders today were keen to stress that the region’s banking sector was stable & sound following Deutsche Bank's sudden slide as markets opened for trade.  German Chancellor Olaf Scholz told reporters at an EU summit that Deutsche Bankis a profitable business with no reasons for concern.  The German lender “has modernized, organized the way it works.  It is a very profitable bank and there is no reason to be concerned,” he said.  Shares of the German lender traded more than 14% lower at one point today after a surge yesterday for its credit default swaps (a type of contract to insure against a default).  This comes just days after the emergency rescue of Credit Suisse Credit Suissea type of contract to insure against a default.  This comes just days after the emergency rescue of Credit Suisse & the collapse of Silicon Valley Bank as well as several measures from authorities stateside to avoid contagion across the financial sector.  French Pres Emmanuel Macron also told reporters in Brussels that the banking system is solid, while ECB Pres Christine Lagarde said the euro area is resilient because it has strong capital & solid liquidity positions.  “The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the Global Financial Crisis to all of them,” she said.

Europe’s leaders battle banking crisis as market rout hangs over Brussels summit

There is a lot to absorb in the banking sector.  Now that US bank problems have calmed, euro banks may need a lot more help.  As expected, gold has risen sharply to around $2000 while these messes are playing out.

Dow Jones Industrials

 






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