Fra SwissQuote:
The selloff in First Republic Bank wreaked havoc in the US session on Tuesday.
The First Republic Bank (FRC) gapped more than 20% lower at the open, after announcing the day before, after the bell, that the deposit outflows following the Silicon Valley Bank’s (SVB) collapse was higher than expected. In fact, some 40% of the deposits left the bank. Then came a Bloomberg report saying that the FRC was considering selling $100 billion worth of long-dated assets to shore up its balance sheet, probably at loss – given that the long-dated assets have lost big since the Federal Reserve (Fed) started raising rates last year. The Bloomberg news triggered an additional chunk of selloff in FRC, which closed the session down by almost 50%.
The FRC drama revived the bank stress. Even before the US open, the European banks were dragging the European equity indices lower. UBS lost more than 2% yesterday despite encouraging deposit inflows following the Credit Suisse debacle, and despite telling investors that it will likely report a gain of around $57bn in the current quarter’s profit thanks to the CS deal.
Invesco’s European banks ETF slid by 3.40%.
The S&P500 lost almost 1.58% and Nasdaq slid nearly 1.90% – even though the US yields fell across the board. The US 2-year yield fell to 3.90% as the worries about the FRC weighed on the Fed rate hike expectations and pulled the expectation of a 25bp hike at the next week’s FOMC to around 77%. This probability was near 90% before the FRC announced results.
Happily, though, PacWest – another regional bank that got hammered by the SVB collapse last month, said, after the bell, that its deposits stabilized in March. PacWest – which shed nearly 9% during the session jumped almost 14% in the extended trading.
Plus, Microsoft and Google announced better-than-expected results, after the bell, as well. Microsoft jumped 8.5% in the afterhours trading after it revealed a resilient demand for its Azure cloud business. And Google gained 1.70% as its cloud business announced its first-ever profit. That profit came just at the right time when investors were wondering whether Google is strong enough to withstand the growing competition, especially to its search engine, with Microsoft’s AI-backed Bing’s surge this year.
As a result, the US futures are in the positive at the time of writing, but that doesn’t mean that the stress over banks will suddenly go away. Gains could quickly evaporate if the worries continue.
US debt ceiling debate heats up
Another big headache for investors is the US debt ceiling – which was reached earlier this year, and which forced the US government to use ‘extraordinary measures’ and to use up its cash reserves to stay afloat.
The problem is the tax receipts came in lower than anticipated in April, leading to rapidly shrinking finances for the government – which is now expected to run out of money as early as early-June if the debt ceiling isn’t lifted.
And a critical vote is set for this Wednesday!
Unfortunately, an agreement about the debt ceiling will likely be challenging for US politicians as Republicans are ready to raise the ceiling, but they ask severe spending cuts as a concession – a thing that Joe Biden obviously doesn’t want to make walking into the election year!
As a result of the US debt ceiling stress, the US 1-month bills, which is now the only maturity that covers for a potential default due to debt ceiling, are unusually highly demanded. The 1-month yield tanked to the lowest levels since October, though it rebounded by more than 14% yesterday, while the 3-month yields continued rising even after the SVB collapsed because in 3-months from now, we could be at the middle of a reached-debt ceiling, which would increase the chance of a default of repayment from the US government. Yikes.
Note that the gap between the US 1 and 3-month yields has never been this stretched. If there is an agreement on the debt ceiling, the short end of the yield curve would rapidly normalize. If not, we will likely continue to see some more volatility.
Moving forward
Renewed worries around the US banks, and the debt ceiling are among factors that should prevent the US dollar from significantly reversing losses.
On the data front, the economic data released yesterday in the US was again… mixed. New homes sales jumped in March, but consumer confidence deteriorated and the Richmond manufacturing index showed a faster-than-expected contraction in April.
Else, the latest API data showed that the US crude inventories fell by more than 6-mio-barrels last week, but the falling inventories could hardly reverse the selloff in crude oil yesterday, which tipped a toe below the 100-DMA as a result of an overall risk selloff in the markets, mainly due to the bank worries, and its possibly bad consequences for the economic growth, hence the oil demand. If the stress level increases, it could be hard for the oil bulls to defend the 50-100-DMA support.
Today, investors will be watching the US durable goods orders, Meta and Boeing earnings, and of course, watching out to see if the FRC stress could extend beyond FRC.
There are early signs that the FRC stress will be contained. But if not, we could see the US yields and equities further fall and low risk assets, like Swiss franc and gold amass safe haven flows.
