Crisis Easing for Now, but is it Enough?

It’s been quite a week, but we are not out the woods, albeit things look a fair bit calmer today than they did Wednesday. Volatility was well and truly back: the biggest moves in 2yr Treasury markets since 1987 and the MOVE bond volatility index hit its highest since 2008. The VIX rose to its highest since October. As a good barometer of the week, the VIXX earlier this week touched 28 but is back under 23 this morning. Expectations for the Fed next week have come full circle – some even talked about a cut amid the turmoil of Wednesday, but it looks as though they will stick to their guns at 25bps, taking the cue from the ECB.

Risk On for Now

European stock markets rallied on Friday morning, with financials +1-3% in early trading, taking the cue from an upbeat session in the US as Wall Street rallied round the regional banks. London, Paris and Frankfurt all rose around 1% but this only taking the FTSE 100 back to 7,500, DAX to 15,155 and CAC to 7,104. The Nasdaq jumped 2.5% to 11,717 and the S&P 500 rose 1.76% to 3,960 to recover the 200-day line. The dollar is down despite front end rates being a bit higher, with DXY futures back below 104 and oil is firmer with fear receding and with hopes perhaps of an OPEC+ move. The ECB, which hiked as planned yesterday, is planning an ad-hoc meeting of its Supervisory Board to look at the situation re banks.

Credit Suisse

Suisse shares rose back to CHF 2.02 yesterday and were a touch higher this morning at CHF 2.04 but no great rally building yet and of send time the stock was off almost 1% lower- this is not great optimism. Credit default swaps eased yesterday but bonds fell. Shares up on short covering perhaps but hardly going up enough to suggest any material recovery. Bonds down indicates fears that holders could get bailed in – ultimately a longer-term solution will be required. The liquidity backstop from the SNB gives time, but it’s not the final answer.

Some of the largest Wall Street banks deposited $30bn at embattled First Republic Bank. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo each made a $5 billion uninsured deposit into First Republic Bank, while Goldman Sachs and Morgan Stanley added $2.5 billion each and BNY Mellon, PNC Bank, State Street, Truist and U.S. Bank each chucked in $1 billion. “Regional, midsize and small banks are critical to the health and functioning of our financial system,” the group of banks said in a statement.

Risky Business?

Shares in FRB had risen 10% but plummeted 17% in extended trading after it said it would suspend its dividend and curtail lending. There are also questions about whether this rescue package is going to work, or do further damage. Banks are supposed to be able to fail – forcing Wall St’s systemically important banks (SIBs) to get involved seems like adding risk, not reducing it.

Billionaire investor Bill Ackman warned that FRB default risk is being spread to the largest banks. “Spreading the risk of financial contagion to achieve a false sense of confidence in FRB is bad policy,” he said in a tweet. “The SIBs would never have made this low return investment in deposits unless they were pressured to do so and without assurances that FRB deposits would be backstopped if it failed. The market has responded to this fictional vote of confidence with a 35% after-market decline in FRB stock.”

Bank You for Being a Friend

US banks have also tapped roughly $165bn from the Fed's emergency facilities in the week to Wednesday, including record usage of the discount window, according to a filing. Borrowing at the discount window rose to a record $152.85 billion, whilst usage of the new Bank Term Funding Program hit $11.9 billion in the first three days. You could look at this two ways – one being that the banking system is clearly facing a lot of pressure; the other being that the response is having the desired effect, by and large. It’s hard to think that the Fed put is back – but it is possible for the Fed to ‘ease’ by providing short-term liquidity and simultaneously tighten policy. For investors it will ultimately come down to fear and loathing – what are you most afraid of and what do you hate least?

Undisturbed by the ructions, the European Central Bank pressed ahead with a 50bps rate hike. Core inflation was the key - inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, higher than it thought in December. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025. Final Eurozone CPI data later today is expected at +0.8% on the month in February, up 8.5% on the year.