US futures are flat with bond yields reversing an overnight drop, lifted by the belly of the curve; the USD weaker for 8 of the past 9 days, and commodities mostly higher as investors shift their focus back to concerns about inflation and potential further monetary tightening from the recent banking-industry chaos; after all, a bank hasn't failed in at least a few days. WTI has soared 5.6% this week.
S&P 500 contracts were little changed as of 7:45 a.m. ET, after earlier gaining as much as 0.4% and closing 0.2% higher on Monday. Nasdaq 100 futures slid 0.2% after the tech-heavy benchmark lost 0.7% on Monday following strong gains over the previous two weeks. European stocks advanced along with Asian equities and the dollar traded lower as fears of broader contagion from the banking turmoil eased.
According to JPM, If bank contagion fears subside, we may see a resurgence in both bond yields and commodities as growth, before the banking crises, was stronger than expected led by the US and a reopened China. "However, banking crises typically have wide-ranging, and negative, impacts on growth and employment." Today’s macro data focus includes inventories, housing prices, regional mfg updates, and Consumer Confidence. Keep an eye on the confidence number as that can impact spending.
In premarket trading, Alibaba shares soared 9% after the Chinese e-commerce company planned to split into six units that will individually explore IPOs. Shares in fellow Chinese ADRs also rallied. First Republic Bank gained 3.1% adding to a 12% jump on Monday after First Citizens BancShares’s agreement to buy Silicon Valley Bank reassured investors in regional lenders. PVH climbed 12% in premarket as the owner of Calvin Klein and Tommy Hilfiger issued stronger-than-expected earnings forecasts. Lyft rose as much as 5.2% after the ridesharing company appointed David Risher as CEO. Here are some other notable premarket movers:
"For now, it looks like the major stress around the banking crisis is calming down and markets can switch back to monitoring the inflation-recession dynamics," said Marija Veitmane, senior multi-asset strategist at State Street Global Markets in London.
As jitters in the banking sector subside, investors are again turning their attention to economic fundamentals and the outlook for Federal Reserve policy. Swaps have meanwhile priced in a more than 50% probability of a rate hike at the next meeting; they continue to expect sharp easing later however, with pricing suggesting the policy rate will slide to around 4.3% in December, down from around 4.95% in May.
Not all agree. “We see major central banks moving away from a ‘whatever it takes’ approach, stopping their hikes and entering a more nuanced phase that’s less about a relentless fight against inflation but still one where they can’t cut rates,” strategists at BlackRock Investment Institute, including Wei Li and Alex Brazier, wrote in a note.
Hugh Gimber, global market strategist at JPMorgan Asset Management, also doesn’t foresee rate cuts anytime soon, even if hikes pause, and cautions against stock-market optimism on it. “I think the market is right to price a Fed pause,” he said in an interview on Bloomberg TV. “The question here is how big the feed through from a deterioration in lending standards is to really get inflation lower towards target, and I’m not that convinced we will see that very quickly. I think we would need a pretty significant economic shock to get there in 2H. Rate cuts are more of a 2024 story.”
European stocks are in the green although they’ve pared gains since the open as investors remain cautious amid risks to the global financial system. The Stoxx 600 has trims gains to 0.2% while Deutsche Bank swings to a ~2% fall from from ~2% rise. Energy, miners and autos are the strongest-performing sectors. Here are the most notable European movers:
Elsewhere in markets, Asian stocks gained as a lull in new developments in the banking sector gave investors a chance to adjust positions and assess whether the Federal Reserve will lower rates to buttress the US economy. The MSCI Asia Pacific Index rose as much as 0.9%, halting a two-day losing streak. A sub-gauge of financial shares jumped more than 1% as they followed US peers higher. Australia, Japan and South Korea advanced. Hong Kong’s Hang Seng Index gained about 1%, while China’s mainland indexes fluctuated. “Asia still remains relatively well insulated from the latest round of US/European bank turmoil,” Citigroup analysts including Johanna Chua wrote in a note. “Direct exposure of Asia to the affected financial institutions is very limited.” Asia’s regional equity gauge has climbed more than 2% over the past week as US bank shares regained their footing after tumbling last week and fanning fears of a looming economic slowdown. Doubleline Capital’s Jeffrey Gundlach said on CNBC that he expects a US recession to start in a few months, and that the Federal Reserve will need to respond “very dramatically.”
Japanese stocks rose for a second day as concerns around financial institutions cooled after First Citizens BancShares Inc. agreed to buy failed Silicon Valley Bank. The Topix rose 0.2% to close at 1,966.67, while the Nikkei advanced 0.2% to 27,518.25. Sumitomo Mitsui Financial Group contributed the most to the Topix gain, increasing 2.7%. Out of 2,159 stocks in the index, 799 rose and 1,232 fell, while 128 were unchanged. “Overall risk tolerance has increased now that the Silicon Valley Bank situation appears to have calmed down,” said Ryuta Otsuka, strategist at Toyo Securities. “However, it is hard to expect large market moves in Japan as we are approaching the end of the fiscal year.”
Australian stocks extended rose with the S&P/ASX 200 index rising 1% to close at 7,034.10, extending gains for a second session, boosted by mining shares and banks. Lithium miners, some of the benchmark’s most shorted names, rallied after Liontown rebuffed a takeover bid from Albemarle. Equities across Asia climbed, US stock futures edged higher and the dollar declined as fears of broader contagion from the banking turmoil eased. Investors await Australia’s CPI print due Wednesday. In New Zealand, the S&P/NZX 50 index rose 1.4% to 11,771.27
Stocks in India were mostly lower on Tuesday as key gauges headed for their fourth consecutive monthly decline amid tepid sentiment for global equities. The S&P BSE Sensex fell 0.1% to 57,613.72 in Mumbai, while the NSE Nifty 50 Index declined 0.2%. The benchmark gauge has slipped about 2.1% this month and is on course for its longest losing monthly streak since Feb. 2016. Software major Infosys contributed the most to the Sensex’s decline, decreasing 0.8%. Out of 30 shares in the Sensex index, 11 rose, while 19 fell. All 10 companies related to the Adani Group fell, led by a 7% plunge in flagship firm Adani Enterprises after a newspaper report said the conglomerate will probably seek more time to repay a $4 billion loan it took out last year. Foreign investors have been buyers of $1.3b of local shares this month through March 24, mainly on back of GQG Partners’ stake purchase in Adani companies. “Barring gains in select banking and metal stocks, other sectors witnessed profit-taking as caution prevailed ahead of the F&O expiry on Wednesday,” Kotak Securities analyst Shrikant Chouhan said.
In FX, the Bloomberg Dollar Spot Index slipped 0.1%, marking its eighth day of declines in the past nine sessions, weighed by a jump in the yen on domestic demand ahead of the fiscal year-end in Japan. Exporters in Japan and Australia added to the selling of the dollar as they increased hedging to cover prior long positions in the greenback, Asia- based FX traders said. The New Zealand dollar and Japanese yen are the best performers among the G-10s while the Swiss franc is the weakest.
In rates, the five-year Treasury yield rises as much as 7 basis points to 3.67%, while the two-year yield climbs 4 basis points to 4.04% after sliding as low as 3.89% earlier in the session; a selloff in Treasuries since the start of the week has lifted most yields from six-month lows reached on Friday. 10-year yields around 3.55%, cheaper by 2bps on the day with bunds lagging by additional 5bp in the sector; 2-year yields cheaper by around 7bp on the day, remain above 4% level vs. Monday’s 3.954% auction stop. As BBG's Beth Stanton notes, Monday's poorly-bid 2Y auction is now under water vs its 3.954% stop with May rate hike back in favor. Auction cycle continues with $43b 5Y at 1pm. WI yield 3.65% is between last two 5Y stops. The US auction cycle resumes with $43b 5-year note sale at 1pm, follows Monday’s poor 2-year result; WI 5-year at 3.63% is ~48bp richer than February’s stop-out. German two-year borrowing costs are up 12bps.
Traders are now betting on a roughly 50/50 chance that the Fed will deliver a final quarter-point hike in May, followed by a similar-sized cut in September; market pricing reflects a diminishing outlook for a series of cuts in the coming months, and a growing view that the Fed may keep rates on hold for longer. BlackRock sees the Fed continuing to raise interest rates despite traders betting otherwise as fears of a banking crisis convulse markets. “We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” its strategists write in a note. “We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts.”
In commodities, crude futures advance with WTI up 0.5% to trade near $73.15. Spot gold falls 0.3% to around $1,951. European and US gas benchmarks diverge slightly in European trade; Morgan Stanley writes that “prices likely still need to move lower to incentivize an adequate supply response, but we may be approaching the bottom”.
Looking to the day ahead, we will have a number of data releases from the US including the Conference Board consumer confidence, the Richmond Fed manufacturing index and business conditions, the Dallas Fed services activity, the January FHFA house price index, and February’s wholesale and retail inventories and advance goods trade balance. We will also have Italy’s March manufacturing and consumer confidence as well as economic sentiment data, and from France the March manufacturing and consumer confidence data. The BoE’s Bailey will testify today on the Silicon Valley Bank crisis, and we will also hear from ECB’s Muller. Finally, we will have earnings releases from Micron, Walgreens Boots Alliance and Lululemon.
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A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks traded mixed with a mild positive bias as global banking sector fears continued to dissipate and with early advances led by energy after the recent surge in oil prices although gains were capped in the region as North Korean nuclear rhetoric stoked geopolitical concerns. ASX 200 was boosted amid strength in the commodity-related sectors with outperformance in energy after oil prices notched the largest daily gain since October and financials were also lifted as Australia downplayed the risks to domestic banks from the recent global banking issues. Nikkei 225 was indecisive despite Japan reiterating plans for a JPY 2.2tln economic stimulus package with trade stuck in a narrow range near 27,500 after the nuclear rhetoric by North Korea which called for the scaling up of weapons-grade nuclear materials and included similar language used before its last nuclear test in 2017. Hang Seng and Shanghai Comp. were choppy ahead of key earnings results and after PBoC liquidity efforts.
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European bourses were initially firmer across the board in a continuation of the APAC tone, though benchmarks have since eased from best and are flat/mixed. Sectors are mixed with Energy outperforming while Banking names were firmer but have eased off of best levels and incrementally into the red alongside the broader benchmarks throughout the morning. Stateside, futures are mixed/flat, though with the bias inching further into the red, as the region awaits todays Senate Banking Committee hearing on the recent banking turmoil with Fed' Barr in attendance. Meta Platforms Inc. (META) plans to lower some bonus payouts and will more frequently assess employee performance, according to an internal memo, part of a sweeping revamp of the social-media company that includes large head-count reductions, WSJ reports.
Alibaba (BABA/9988 HK) business unit can reportedly pursue fundraising and IPOs when ready, according to Bloomberg; Alibaba to restructure into six main business divisions.
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DB's Jim Reid concludes the overnight wrap
After a hectic 2 and a half weeks that has felt like a year, the week has started on a much calmer footing. I'm on holiday for a couple of weeks from Thursday so I'm hoping that I don't have to do zoom meetings from the ski slopes. My ski outfit and technique won't make that a pretty sight.
As we highlighted in our CoTD yesterday (link here) we have to be careful not to fight the battle of the last war. Large banks in the US and Europe are completely different entities than they were going into the GFC. For large US banks for example, securities and loans/leases on their balance sheets as a % of deposits are lower than when our data starts in 1985 and at below 100% are massively down from their GFC peaks of over 150%. We don't have the same long term data for Europe but the declines since the GFC are of similar magnitudes.
In contrast corporates are more levered now than during the GFC and this cycle could ultimately be more corporate default focused vs financials as per say 2001-2002 rather than 2008-09. See Steve Caprio's full note here for more on this and how corporate spreads are too tight to financials now.
So no new news was good news yesterday and some risk premium was removed from the market. This was most evident in bonds with US 2yr and 10yr yields up +22.9 bps and +15.4bps respectively. The S&P 500 was up +0.80% in the first hour of trading but did retrace the entire move back to flat before rallying in the US afternoon to finish with a an overall modest gain of +0.17%, whilst the STOXX 600 climbed +1.05%. US banks led the US move higher, having traded off their lows from last week, with the S&P 500 banks index up +3.05%. European banks were earlier +1.69% higher.
Narrowing in, First Citizens jumped 49% at the market open after its agreement to buy SVB Financial Group’s Silicon Valley Bank, ending the day up by +53.74%. First Republic Bank similarly jumped at the open by +27.45% after a Bloomberg report that US authorities were considering an expansion to their emergency lending facility, the Bank Term Funding Program, that had been created on March 12 with the collapse of SVB and Signature Bank. Against this backdrop, the gauge of regional US banks, the KBW index, closed up +2.54% yesterday, with the leaders including First Republic (+12.14%), Comerica (+5.40%) and KeyCorp (+5.31%).
Improving risk sentiment saw investors pare back their expectations of Fed rate cuts, as the implied rate for the Fed’s May meeting gained +9.2bps, bringing it to 4.950%. In other words, fed futures are now pricing in a 53% chance of a +25bps hike in May. For December’s meeting, markets trimmed their expectations of rate cuts from over -94bps on Friday to nearly -74bps, as the implied rate rose +29.5bps to 4.206%.
Back on this side of the pond, the German March Ifo business confidence index printed above expectations at 91.2 (vs 88.3 expected), and up from 88.5 for February. The other two individual components of the release also beat expectations, with business climate rising to 93.3 (vs 91 expected) and current assessment at 95.4 (vs 94.1 expected). Although the Ifo survey typically demonstrates less sensitivity to financial market uncertainty relative to other surveys coming from Germany such as the ZEW survey, the release is consistent with last Friday’s PMIs that suggested the Eurozone economy remains in, or at least was in decent shape, before the banking crisis hit.
Consequently, the DAX outperformed relative to the broader STOXX 600 index, up +1.14%, whilst the STOXX 600 advanced by +1.05%. For the latter, all major sectors were in the green, with sector leaders including health care (+1.93%), utilities (+1.31%) and autos (+1.89%). The CAC also gained yesterday, up by +0.90%. Following from Friday’s jitters about European banking sector stability, ECB’s Simkus emphasised that ‘bank liquidity, capitalisation (are) high in euro area.’ ECB’s De Cos echoed this sentiment, stating ‘euro-zone banks (are) well-prepared for adverse scenarios’.
We also heard from several other ECB’s speakers yesterday, as ECB’s Schnabel stated she had pushed for the ECB statement to say that more hikes were a possibility as opposed to the verbal assurance that had been made by President Lagarde. ECB’s Centeno’s comments were more dovish, as he stated that they “don’t see long-term inflation expectations de-anchoring”, with “no signs of second-round effects in wage-setting.” Markets moved to price in a modestly higher terminal rate as Eurozone overnight index swaps for July were up +7.5bps bringing the rate to 3.321%. The rate for year-end also increased, up +11.5bps to 3.226%, pricing in a 1 in 3 chance of a -25bps rate cut by December. Against this backdrop, yields across the German sovereign yield curve were up yesterday, with the 10yr bund yield climbing +9.8bps higher bringing the yield to 2.227%. The 2yr yield gained +12.8bps to 2.521%
Asian equity markets are mostly higher overnight. As I type, the Hang Seng (+0.60%), the KOSPI (+0.44%) and the Nikkei (+0.07%) are higher but with stocks in mainland China mixed with the CSI (-0.16%) edging lower while the Shanghai Composite (+0.05%) is oscillating between gains and losses. US stock futures are a little higher with contracts tied to the S&P 500 (+0.16%) and NASDAQ 100 (+0.17%) printing mild gains. Meanwhile, yields on 10yr Treasuries (-1.89bps) are slightly lower, trading at 3.51% while 2Yr Treasuries (-3.5bps) are trading at 3.96% as we go to press.
In early morning data, retail sales in Australia rose +0.2% m/m in February, in-line with market expectations, down from a revised +1.8% increase in January, signifying that households are reining in spending in response to higher interest rates. The subdued data adds to the case for a pause by the Reserve Bank of Australia (RBA) at its April 4th meeting. Meanwhile, the CPI data scheduled to be released tomorrow will be of note for the central bank.
Turning to commodities, WTI crude futures performed strongly yesterday, rising +5.13% to over $72.81/bbl, whilst Brent crude gained +4.17% to $78.12/bbl. European natural gas futures also gained +3.49% yesterday. The rally in energy prices was due to both supply-side and demand-side pressures. On demand, the rally in bank stocks and purchase of SVB seemed to ease concerns of a wider financial crisis. Meanwhile, a legal dispute between the Iraqi semi-autonomous region of Kurdistan and Turkey has put about 400,000 bbl/day of exports in limbo. This come as French refineries are running at a fraction of normal capacity due to the ongoing protests in the country. A Bloomberg report had as much as 80% of the nation’s crude-processing capacity stalled.
Finally, yesterday also saw the release of the Dallas Fed Manufacturing Activity for March which fell below expectations at -15.7 (vs -10 expected). This was a further decline from -13.5 last month as perceptions of broader business conditions deteriorated over the month.
Now looking to the day ahead, we will have a number of data releases from the US including the Conference Board consumer confidence, the Richmond Fed manufacturing index and business conditions, the Dallas Fed services activity, the January FHFA house price index, and February’s wholesale and retail inventories and advance goods trade balance. We will also have Italy’s March manufacturing and consumer confidence as well as economic sentiment data, and from France the March manufacturing and consumer confidence data. The BoE’s Bailey will testify today on the Silicon Valley Bank crisis, and we will also hear from ECB’s Muller. Finally, we will have earnings releases from Micron, Walgreens Boots Alliance and Lululemon.