Broad Relief 

There’s a sense that we got through the hardest part with Monday’s volatility dialing down. Shares in London, Paris and Frankfurt rallied more than 1% again in early trading on Tuesday. The FTSE 100 pushed up around about 100pts to 7,505 and back above its 200-day moving average. Banking shares were generally higher with gains of around 3-4% for the major players. CS was a tad lower. UBS rose around 4% though Moody’s joined S&P in downgrading the bank’s bonds. VIXX retested last week’s highs above 28 but is down to a 24 handle this morning. 

Stocks Cautious of More Dominos 

After an initial selloff in early trade on Monday, European stocks rallied as confidence slowly returned throughout the session. Stocks are firmer again this morning with investors buying into the idea that the worst of the banking troubles are behind them – we shall see. US stocks rose yesterday with the Dow up 1.2% and the Nasdaq Composite rising 0.4%. The broader S&P 500 rallied 0.9% to 3,951 and to move clear of the 200-day line at 3,930. Treasury yields sit at 3.5%/4.0% for 10s/2s, with gold off it’s the one-year high struck amid the worst of the weekend turmoil at $1,966. Crude oil firmed with WTI (May) futures up to $68.49, over $4 above yesterday’s low.  The dollar is lower with risk on, DXY futs testing 103. Cable is holding onto 1.22 but off the 1.2280 highs earlier.  

Whilst the Swiss were hoping to draw a line under Credit Suisse, over in the US the embattled First Republic Bank was posing more problems as its shares slid 47% despite a $30bn deposit from Wall Street big brothers. Talk now is of converting this to equity to shore up FRC – sounds like good money after bad – though shares trade up 14% pre-market. KRE regional banks ETF managed to rise a modest 1%. 

To Pause or Not to Pause 

Despite the apparent relief, uncertainty is still in charge. What we are seeing is that once events take over, policymakers are left with zero good options. The Federal Reserve faces a dilemma and one of the most difficult decisions in years – it can hike or it can pause or even cut – Nomura says cut which makes me wonder about their bond portfolio. And we have the usual suspects always calling on the Fed to cut. The truth is the Fed is already easing by turning on the liquidity taps – redeeming Treasuries at par etc.  

It seems as though the Fed will take the ECB’s cue and raise, though it may refrain from a full 50bps and prefer 25bps. Markets price in a roughly 83% it goes for this move, with ~17% chance of no hike. The meeting kicks off today with the statement and policy announcement tomorrow evening. On the actual data side of things, inflation has fallen to 6% but clearly remains way too high.  

Data Unlikely to Rouse an Unphased Fed 

Consumer prices in the US rose 0.4% for the month, taking the annual rate of inflation to 6%, according to the US Labor Department. These were in line with forecasts. Core CPI increased 0.5% in February and 5.5% on a 12-month basis – slightly ahead of forecasts. The CPI suggests we could see 12-month core PCE inflation – the Fed’s preferred gauge – accelerate to 4.8% from 4.7%. With this report the Fed would normally be a slam dunk to raise rates by 25bps though markets have been questioning this in the wake of the bank crisis: I don’t think the Fed blinks unless we see a lot more turmoil in the next day, which seems unlikely – it will be months before now the true extent of the fallout and damage of the last fortnight. We are now firmly into the discussions about what the Fed calls ‘long and variable lags’ of monetary policy. 

Smaller Ripples in the Market 

We live in interesting times. They may not seem like terribly interesting announcements, but there have been notable interventions in the last 48hrs. In a statement released yesterday in the wake of UBS agreeing to purchase Credit Suisse and nixing a chunk of bonds, the Bank of England confirmed that alternative tier 1 (AT1) bondholders would be prioritised over shareholders in the event of a bank collapse.  The point is that for the BoE to be issuing a statement on what would happen if a UK bank were to go the way of Credit Suisse, it shows just much things have altered in the space of two weeks. We’re hearing a lot about hierarchy right now. This may just be good housekeeping, but it’s not normal. Meanwhile the SRB, EBA and ECB sought to reassure holders of these types of bonds, saying in a release that “...common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down”.   

RBA meeting minutes showed “Members agreed to reconsider the case for a pause at the following meeting … to allow additional time to reassess the outlook for the economy" but the cash rate was likely to be "increased a little further" as "inflation could be more persistent than previously thought".  

Final word on CS, it was a classic case of how does one go bankrupt? gradually and then all at once.