As global banks raced out to hedge counterparty risk, inverting Credit Suisse Group (NYSE:CS) CDS, multiple versions of alarming visuals, Credit Insurance, or one year CDS spreads graphics, were a mainstay on finance-focused social media on Wednesday and likely contributed to the tumult. However, the sharks are still circling in rates-sensitive parts of the global economy despite the SNB cavalry riding to the rescue in the form of a backstop.
There is no question the US-centric banking crisis has since dramatically shifted globally. Unfortunately, a nasty can of worms has been opened, and short traders will still key on those rates-sensitive areas.
Beyond contagion risks in the banking system, the focus is now squarely on spillovers in the form of economic growth risks, which could wreak havoc on the global economy as banks tighten lending controls. And Pro-cyclical sectors like energy are getting hammered as oil prices tank.
The drag on growth from a housing pullback may have peaked, but it's hard not to expect the housing market pullback in most major economies to persist.
In recent months, we've seen a rise in commercial real estate (CRE) delinquencies, which we expect may be exacerbated by the volatility in the financial industry and greater lender scrutiny. Second to this are economy-driven industries, materials and energy, as the markets are sending one consistent message: fears of a global recession are imminent if you believe that pricing US rate cuts rather than hikes foreshadow recession doom which could eventually “paint the tape” bright red.
But the far more immediate and present recession danger occurs when a rapid yield curve steepening occurs after inversion. That event usually informs investors it could be time to get out of dodge.
FOREX
Despite the front-end reset, SNB backstop, and possible Fed cut later in the year if the situation warrants, global markets remain "in a world of hurt" as recession risks rise, and we still may see the ultimate dash for dollars if this keeps up.
If European funding conditions continue to tighten, a weaker euro will result via a more dovish ECB reaction function and, in these circumstances, create a natural demand for safe-haven dollars.
Even if ECB hiked in an environment of heightened stress, the euro would likely tank, given that rate hikes are currently the market's plague.
OIL
This week oil prices experienced a significant correction as macro investors liquidated length across the complex driven by a sharp rise in recession fears, with energy traders drawing straight-line parallels to prior bank sector-driven recessions, especially the 2008 financial crisis, which has similar overtones to the current financial tumult and when oil tanked.
As pressures have built across the oil complex, investors are lowering their exposure and raising hedges across risk assets with a decline in length in indices such as the BCOM, combined with increased put buying to hedge tactical recession risks. When taken together, it makes for a volatile oil environment.
Unlike financial markets, oil prices perform a critical economic function, so it is impossible to remain bullish on oil, especially in a recessionary environment, if demand levels fall below supply which current data suggest is the case.
GOLD
Gold is still working as a bank-run safe-haven hedge. However, if things get shaky enough and recession comes knocking, investors will be forced to cut profitable positions to pay for margin calls on other parts of their portfolios.