March 27, 2023
Good morning,
There seems to be a collective sigh of relief running through financial markets this morning and it started in the financials. On the news that First Citizens Bank agreed to buy Silicon Valley Bank (SVB) and a separate report that U.S. authorities are considering expanding an emergency lending facility for banks in ways that would give First Republic Bank (FRC) more time to shore up its balance sheet, U.S. and European lenders are showing some notable gains this morning. In U.S. pre-market trading, regional banks are up the most, led by FRC up ~25%. Major money centers are up +2% across the board. S&P Futures are up +.75% and U.S. Treasuries are experiencing a spike in yield. In sum, this morning’s market action looks like the beginnings of a reversal of the violent market moves triggered by the failure of SVB and the liquidity crisis that ensued.
Will the markets fully return to the pre-crisis price levels and trends in stocks, bonds, commodities, and currencies, as this morning’s risk-on sentiment suggests? It is not likely. Even though Fed Chair Powell said the recent bank runs are isolated events, at the same time, he acknowledged that as a result of the banking sector fallout, credit conditions will tighten. While Powell conditioned his statements by saying that the degree of negative impact on the economy will depend on the extent and duration of the credit tightening, it was pretty obvious that whatever odds of a soft landing were there pre-crisis, those have now diminished greatly.
My market concerns are not (yet) technical – March has seen some damage to the technicals but not enough yet to revive the bear market moniker as long as it stays above the Dec lows. My concerns are macro and the fact that recession risks are rising. At last week’s Fed meeting, they estimated Q1 GDP growth currently at +3.2% annualized and they projected Q4 growth at +0.4%. That implies negative average GDP growth for the rest of the year.
Be well,
Mike