Weekly Market Commentary – 3/17/2023
-Darren Leavitt, CFA
Financial markets continued to be erratic as investors assessed the health of the global banking system. The failures of Silicon Valley Bank and Signature Bank were met with multiple responses from the federal government and the private sector to restore confidence in the system; however, concerns about what may still be undermining the system are top of mind for Wall Street and conjured up memories of the great financial crisis.
First Republic Bank, which initially seemed to be a beneficiary of deposits, leaving SVB, was met with mass client departures, which cascaded into a selling frenzy in bank stocks. An uninsured deposit of $30 billion from eleven banks, including JP Morgan, Bank American, and Wells Fargo, initially stemmed the selloff and produced a nice bounce in banking stocks. Still, it was short-lived after the bank announced that it would halt its dividend and that the bank had materially tapped the Fed’s discount window for more liquidity. Multiple downgrades by Wall Street did not help the matter, as some analysts questioned if the bank was worth anything.
Not helping matters, Credit Suisse, a major global bank, came under pressure as its largest shareholder, the Saudi National Bank indicated that it would not put more capital into the bank for several reasons and noted regulatory changes that would incur if it became a greater than 10% owner. The announcement again cast more doubt into the banking system and Credit Suisse as a going concern which induced the Swiss National Bank to inject $53 billion into the bank. Other global banks, in response, backed away from doing business with CS on counterparty risk concerns. As I write, there are reports that CS and UBS are in talks for some deal, a notion dismissed entirely as an option earlier in the week.
The uncertainty of whether this is an isolated issue with a few banks or one that has systemic implications has produced wild swings in the US Treasury market. The 2-year yield is down over 100 basis points in two weeks with significant daily fluctuations. Safe-haven assets have become vogue again, with Gold approaching $2000.oo an Oz. Interestingly, large-cap Tech was also well bid with the idea that these companies are a place to weather the storm because they have war chests of cash and solid balance sheets. Also of note, Tech generally benefits from lower rates.
The Fed’s decision on their policy rate due in the coming week has also been a prominent debate. The European Central Bank went ahead with a 50 basis point increase in their policy rate, and ECB officials said more hikes were likely needed to get inflation in check. I am in the camp that the ECB’s move gives the Fed cover for a 25 basis point hike but that the Fed will telegraph a pause to assess upcoming inflation data and the current banking situation. Fed Funds futures currently assign a 70% probability of a 25 basis point hike. Something also to consider over the next several months is the possibility of more divergent global central bank policy. If the US is set to pause, perhaps while the ECB continues to raise rates and China adds more stimulus- it will have multiple implications for multiple asset classes.
The S&P 500 gained 1.4%, the Dow fell 0.1%, the NASDAQ climbed 4.4%, and the Russell 2000k lost 2.6%. The S&P 500 closed below its 200-day moving average (3937) and is in an area that is being closely watched as support/resistance. The US Treasury curve flattened as the 2-year note yield fell seventy-seven basis points to 3.82%, and the 10-year yield fell thirty basis points to 3.40%. Oil prices fell 13.5% as WTI closed below $70 a barrel at $66.87. Concerns over global growth and data that showed Russia continues to pump oil while supplies are in surplus were cited as reasons for the steep selloff. Gold prices soared nearly 6% or $108.30 to $1975.40 an Oz on a flight to safety bid. Copper prices fell $0.11 to $3.90 an Lb. The US Dollar was weaker on the notion of a Fed pause and lower rate differentials.
The economic data calendar was stacked this week and generally gave the impression that inflation continues to moderate but still is at an unacceptable elevated level. The February Consumer Price Index came in line at 0.4%, up 6% on a year-over-year basis, down from 6.5% in January. The Core CPI, which excludes food and energy, came in lower than expected at 0% versus the consensus of 0.4%. On a year-over-year basis, the core number was up 5.5% relative to a 5.6% increase in January. Producer prices also improved at -.1% on the headline number and flat on the core number. February Retail Sales indicated that the consumer showed more discretion in their purchasing. The headline number decreased by 0.4% versus the consensus estimate of a 0.2% gain. Initial claims fell below 200k to 192K, and Continuing Claims regressed to 1.684M from 1.713m.
Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness. All such third party information and statistical data contained herein is subject to change without notice. Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures. All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.