US futures are nudging higher as the market bets the fed loses its nerve and downshifts anyway. Note the modern-day history book of Fed pauses is very bullish for stocks.
With bond markets "doubling down" on rate-cut bets and few lifelines in reach, the dollar continues to pay the prices for heightened policy confusion to solve a deposit confidence story that is extraordinarily vexing for US investors.
And with Powell and Yellen losing one of the biggest confidence games in history, US bank stocks continue to underperform European and Asian banks even with the ebb in volatility, which makes Europe and Asia a much safer bet; hence FX traders have been dialing for currencies most of the Asia session. Where the stronger Yuan should promote greater risk-taking locally, even if it is of the safe haven variety
In previous bank equity shocks, there have been three notable stages:
- Sizing near-term impact and contagion risk
- Framing funding/more medium-term earnings impacts
- Repricing the cost of capital
And now that we are moving into stage three, the rise in the cost of funding has shown significantly more persistence in the US senior bank credit risk. It paints a highly challenging outlook for Main Street USA; hence confidence in the US banking system is getting painted red by a weaker US dollar.
OIL
Oil prices have been caught on the swing, but the stronger Yuan/ weaker US dollar should allow China fundaments to break through. While traders are still concerned about possible credit implements in the US economy that could slow the US heartland industrial wheels and another liquidy shock. But the weaker dollar on back notable gasoline and distillates declines, at least for today, paints a tentatively bullish backdrop.
But ultimately, we are in the OPEC patience trade zone where OPEC's patience and strong demand growth in China and India could push the oil market back into deficits from June 2023 onward.