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Stocks sell off

European shares tumbled on Friday after a sharp selloff on Wall Street amid a sudden crisis of confidence in the banking sector. Selling in European banking names took hold with losses of 4-8% in early trade for some of the largest names, with Credit Suisse falling to an all-time low and financials on the FTSE 100 down around 4%, with HSBC -5.3%, and Barclays -5.4%. London, Frankfurt and Paris were all down by close to 2% after a drubbing on Wall Street left the S&P 500 down 1.85% to 3,918, breaking down through the 200-day moving average and March low. US indices are on track for a weekly loss in excess of 3%. Jitters about payrolls data today is also a likely factor in investors pulling in their horns today. 

 

Bank contagion

The selloff in banks seems to have been spark by after SVB Financial sank by more than 60%. This was after Silicon Valley Bank, a prominent lender to tech startups, announced a $2.25bn capital raise in response to a $1.8bn loss on the sale of a portfolio marked at $21bn. The portfolio included US Treasuries and mortgage-backed securities. Bank of America and Wells Fargo – seen as financial bellwethers for the US economy – declined 6% and the KBW Nasdaq Bank Index slipped 7.7%, its worst performance in three years.

 

Lehman moment?

I don’t think so. SVB does not represent the wider US banking sector, albeit the plummet in SVB stock clearly hit sentiment. It seems as though SVB was just gripping the wrong end of the stick with regards to rising interest rates, parking way too much of its assets in long-dated bonds which it thought safe but are now worth a lot less. Funnily enough, bond yields fell sharply as investors went into fixed income amid some potential signs that the Fed’s rate hikes might be working. Weekly jobless claims in the US jumped by the most in five months. Whilst SVB probably doesn’t portend a wider banking crisis, it could be the straw that breaks the camel’s back as far as the market is concerned – we’ve been waiting for the final flush lower for a while now and peak rate expectations + very nascent signs of cracks in the US economy make for the right cocktail of risks for the market to fall.

 

Payrolls ahead

Nonfarm payrolls data is up later today, likely to provide a very important and telling steer for the market with regards to the Fed’s likely policy decision on March 22nd. Nonfarm payrolls are forecast to have risen by around 205k last month, down from the monster 517k in January. Wages are seen at +0.3% and unemployment steady at 3.4%. The question is how does the number need to be to get the market thinking the Fed goes for 25bps rather than 50bps? I think we are just about reaching the point where the hard landing becomes inescapable and I don’t think this is a case of bad news is good news for stocks, (though it might be today) because we get hard landing + the Fed still tightening to combat inflation. 

 

Shush!

The Fed blackout period is about to begin, too, so at least we won’t be hearing from FOMC speakers over the next two weeks. As Ken Griffin says, perhaps the best thing for Powell and the rest of the FOMC would be to just shut up. The Citadel founder told BBG: “The variance of the message over the last couple of weeks has been incredibly counterproductive.” You don’t say...

 

UK economy: not so fast

Britain’s economy grew more than expected in January – reports about its demise may have been premature. But growth of 0.3% between December and January is still not exactly firing on cylinders –output is still down 0.2% on February 2020 and flat with last year. There is lots for the Chancellor to do with his Budget next Wednesday.

 

Bank of Japan

The yes slipped against the US dollar after the Bank of Japan was unchanged on interest rates and yield curve control in Kuroda's final meeting, saying that output and exports are now "moving sideways" rather than increasing. No change was expected but overnight yen implied volatility had suggested some market participants were worried about a surprise in his final meeting. There is definitely a sense that we are waiting for the normalisation process to begin so every time the BoJ sticks to the stimulus script there is some disappointment that pushes the yen down. As previously noted, yield curve control cannot last much longer and the exit could be painful for global bond markets.

 

Crude oil

Crude prices continued to decline as markets shifted towards a hard landing narrative, seem headed to be sharply lower this week, about to test the trend line drawn along the swing lows since December.

Crude Oil prices decline

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