The policy measures jointly announced by the Treasury, FDIC and Federal Reserve to help deposit migration within the banking system are likely quelling some concerns around a broader contagion (at least for now). And price action in the S&P 500 beyond Financials is buffeted by a lower rates environment.
Treasury yields across the curve are sharply lower; 2-year yields are down ~50 bps, while 10-year Yields are down ~20 bps. Traders continue to price out a Fed reacceleration in March and a possible pause and rate cuts in 2023.
But with the VIX trading at +25, it is still challenging for investors to operate in the Red Zone( +20)
Worryingly there is escalating tensity in the global financial world; this is despite non-US banks' exposure to US regional banks being minimal, with the global systems being well capitalized and flush with liquidity. But US financial stress could lead banks of all stripes to retrench lending to the real economy and tighten broader financial conditions, the amplifying risk to the broader markets. And a lower rates environment would likely hit worldwide banks' profits.
Global housing has been a significant concern of late with rising mortgage rates, triggering some fears that MBSs could be the next house of cards to topple.
Last week market sentiment swung from expectations of steeper Fed and ECB hiking cycles with still robust labor market data to financial stability and liquidity concerns following the failures of SVB and Signature Bank (NASDAQ:SBNY). And the speed of the moves in all cross-assets likely sees traders heading for the sidelines.
FOREX
The combination of a still-strong macro backdrop and risks around the banking system has made the Fed's path highly uncertain from here. And with the market packing in a higher US domestic contagion risk, the Dollar has suffered as rates market re-price a lower Fed glide path and even a possibility of a pause.
But the Dollar downside could be limited from here either because a banking crisis would trigger a sharp global risk-off benefitting the Dollar due to its safe-haven status and if systemic risks fade and the focus shifts back to the Fed's inflation fight. Indeed the market stress test is on a collision course with CPI inflation later today.
The market reaction to a hotter-than-expected CPI should be a tell
OIL
Oil prices are caught in a whipsaw of global financial contagion risk. The bigger worry in cross-asset sentiment is that the spillover from US banking stress could lead worldwide banks to curtail lending to the real economy and therefore tighten broader financial conditions, amplifying the growth drag already underway. One way or another, global consumer confidence will take a significant hit, which usually squashes any upcoming travel plans that involve planes, trains and automobiles.
GOLD
Gold investors backed up the truck yesterday on the premise the Fed will have little option to ensure that ample Dollars are in the system event against the backdrop of sticky inflation. With real yields toppling, gold was in vogue.
Even though gold would likely fare exceptionally well in broader bank stress scenarios, the " insurance premium” is getting a little expensive, given the uncertainty around the FED's actual reaction function.