Market movers today
Apart from all news regarding problems in the banking sector, focus today is on US CPI for February. In line with consensus, we expect 0.4% m/m for both headline and core indices, still clearly above what is compatible with 2% annual inflation and hence supporting further rate hikes, all else equal. Michelle Bowman from the Fed Board of Governors is due to give a speech on modernising the US banking system this evening, potentially interesting in light of the current issues in banking.
Also important, labour market data is out today in the UK. As elsewhere, the labour market has remained tight and several Bank of England (BoE) members have expressed that particularly the wage growth will be key to follow. Wages slightly decreased during December (from high levels) and are expected to drop further in January in combination with a slightly higher unemployment rate. A new uptick in wages would most likely be a big headache for the BoE.
The 60 second overview
Fear of a banking crisis unfolding: Yesterday was a historical day in all aspects as fear spread through the rates markets of the risk of an unfolding US banking crisis among the regional banks could have wider repercussions. Markets took out a full 50bp of the peak ECB policy rate by the end of the day, now standing at 3.28%, while markets repriced Fed expectations by 62bp to 4.76% peak at the end of the day. 10y German Bund yields dropped 25bp to 2.26% after it recovered some 5bp in the latter part of the trading session. The 2y German yield dropped 40bp yesterday, the most on record.
The US Treasury, Federal Reserve and FDIC’s attempt to stabilise markets on the back of the measures announced Sunday night was not enough to contain the stress to SVB. Early in the day, it was rumoured that First Republic Bank was also at risk despite its affirmation of significant liquidity buffers. Similar Western Alliance saw similar turmoil.
Looking ahead, we note that the reaction in inflation markets has been remarkably limited with a general steepening of curves. To us, that highlights that lower real rates and a weaker USD in isolation are inflationary by nature. By extension that entails that if/when systemic risk concerns fade there could be plenty of room for markets to price back in rate hikes from central banks. In the very near-term, we do see a slight potential for a relatively firmer and hawkish ECB on Thursday than Fed next week, which could add some 1-2W topside to EUR/USD.
That said, for the time being we prefer a quite humble and nimble approach until we get more clarity on what arguably is a quite binary outcome with respect to systemic risk fears. Either we have reached a limit as to how much central banks and not least Fed can hike; that would mark a complete game changer for the macro environment in the coming quarters – or it might be that regulators and authorities are able to calm markets again, which leaves an immense reversal-trade potential. Either way volatility is here to stay for the coming weeks.
Equities: Equities were mostly lower Monday. However, the interesting story is the massive sell-off in banks and the remarkable reprising of central banks and not least the Fed. This is only day two or day three of the crisis created by SVB and given the massive increase in uncertainty one should also note that a drop of 0.5% MSCI World yesterday is in historical context next to nothing. Banks have led the sell-off with KBW index down almost 12% yesterday and not surprising to see Italy leading the sell-off in Europe. Again, please note that five sectors including tech were in green yesterday. VIX rose by two points to 26.5 in yet another sign of how this is more a sign of increased fear and uncertainty. In US yesterday, Dow -0.3%, S&P 500 -0.2%, Nasdaq +0.5% and Russell 2000 -1.6%. Asian markets are lower this morning led by banks (note, Asian stocks rose yesterday). European and US futures are higher this morning.
FI: With the repricing of central bank expectations, markets are now split on the size of the rate hike from ECB on Thursday. ECB sources yesterday said that the hawks will face stronger opposition to the 50bp rate hike they intended. We still expect ECB to hike 50bp on Thursday, although with significant communication on the risks to the outlook. As regards the Fed, yesterday’s repricing has now shown that Fed is more likely to stay on hold than hike at next week’s meeting. Overnight, US treasuries have been relatively stable, although we expect a choppy session today waiting for new info on the US banking situation ahead of the US CPI today.
FX: Massive rates volatility with some spill-over to FX, albeit to a lesser extent. Central banks have been completely re-priced, leaving room for potential surprises in either direction. EUR/USD oscillated between 1.0650 and 1.0750 yesterday and is starting the day at 1.0700. Scandies had a really tough first half of the session, but found some support in the afternoon. Broad USD stands out as the clear loser within G10 for the past three days, with CHF and GBP as the top performers
Credit: Credit markets continued in risk-off mode on Monday, following the collapse of Silicon Valley Bank over the weekend. The collapse created a massive sell-off in equities within the banking sector as well as significant widening of credit spreads. Itraxx Main widened 8.5bp to close at 90.0bp, while Xover widened 33.8bp to close at 460.1bp. The negative sentiment also affected primary credit markets, exemplified by Fannie Mae’s decision to postpone the sale of USD500m in mortgage-linked bonds.
Nordic macro
In Sweden, focus will be on the parliamentary hearing of the Riksbank, where all board members will participate. The topic is the annual report for 2022 and the February policy decision. The Riksbank reported a total loss of SEK80bn for 2022, driven by the mark-to-market valuation of their bond holdings wiping out the equity position into a negative SEK-18bn. Under the new Riksbank law, the Riksbank will therefore have to ask for a recapitalisation at the latest in spring 2024. There will likely be questions around this and how this will be managed, but we would also expect questions around financial stability risks given the current market turmoil.
