March 14, 2023

Daily Market Commentary

Canadian Headlines

  • The yield on short-term Canada bonds is falling at the fastest rate in decades, as investors bet the Bank of Canada will cut rates in coming months to counter fallout from the collapse of US regional banks. Canada’s two-year benchmark yield tumbled 42 basis points Monday to 3.532%, bringing its total decline since Wednesday to about 77 basis points. The last time the benchmark dropped that much over three trading sessions was in May 1995, according to data compiled by Bloomberg. Traders in overnight interest swaps are now pricing in rate cuts from the Bank of Canada by June. Last week, traders were expecting the next move to be a hike. It was a day of investors seeking safe havens as the collapse of regional US lenders Silicon Valley Bank and Signature Bank rattled investor confidence in the US banking system. Gold jumped and US Treasury yields also saw a historic decline. Economists at Nomura Securities predicted the Federal Reserve will reverse course and cut its benchmark interest rate by a quarter percentage-point at next week’s policy meeting.

World Headlines

  • European stocks steadied after falling for three straight sessions as investors weighed concerns about the global banking sector, while also awaiting US inflation data for clues on the Federal Reserve’s policy outlook. The Stoxx 600 Index was little changed by 9:57 a.m. in London following its biggest drop since mid-December. Banking shares remained under pressure amid continued focus on the fallout from the collapse of US-based Silicon Valley Bank. European stocks’ strong start to the year has been derailed this month by a double whammy from hawkish comments from Fed Chair Jerome Powell as well as nervousness about the health of the banking sector following the failure of SVB and Silvergate Capital Corp. Global financial stocks have now lost about $465 billion in market capitalization since Friday, while Moody’s Investors Service has placed First Republic Bank and five other US lenders on review for a downgrade.
  • Treasury yields rebounded after epic declines and US equity futures rose on Tuesday as investors await inflation data that may upend bets that the Federal Reserve is done tightening. The yield on the two-year Treasury — the most sensitive to interest rates — climbed about 25 basis points to 4.25%, still more than 70 basis points lower than this time last week. Plunging rates captured Wall Street’s attention yesterday, when the yield dropped more than a half-percentage point in the biggest move since the 1980s. The 10-year yield rose four basis points to 3.60%, while a gauge of the dollar snapped three days of losses. Futures on the S&P 500 and Nasdaq 100 rose about 0.4% as regional banking stocks rallied in premarket trading. First Republic Bank, whose shares tumbled by a record 62% on Monday, jumped as much as 20%. Among larger lenders, Wells Fargo & Co. and Bank of America Corp. gained more than 3%.
  • Asia’s benchmark stock index erased all of its gains for the year as financials extended the rout triggered by the implosion of Silicon Valley Bank. The MSCI Asia Pacific Index dropped 2.3% on Tuesday, with Japanese banks among the biggest drags on the gauge. The measure is down about 9% from this year’s high on Jan. 27, nearing a technical correction. The Topix slumped almost 3%, its biggest daily decline in more than five months while the MSCI ASEAN Index was nearing correction territory, having declined 9.8% from a January high. The global turmoil sparked by SVB’s troubles has compounded problems for Asian stocks, which were already weighed down in recent weeks by a selloff in heavyweight Chinese shares and concerns about higher-for-longer US interest rates. The first US bank failure since 2008 has deepened concern that policymakers’ efforts to quash inflation with rate hikes will catapult the economy into a recession.
  • Oil extended losses ahead of key inflation data as the biggest US bank collapse since 2008 continued to ripple through financial markets. West Texas Intermediate traded near $73 a barrel after closing 2.5% lower on Monday following a volatile session. Investors are waiting the consumer price index read due later Tuesday for clues on the US monetary path, though bets are increasing that the Federal Reserve won’t raise interest rates next week due to the fallout from the demise of Silicon Valley Bank. Brent’s nearby put skew — a gauge of how much more traders are willing to pay for contracts that profit from a price decline rather than a rally — rose to the highest level since mid-August on Monday amid the market turmoil.
  • Gold edged lower in Asia after surging more than 5% over the three previous sessions as the collapse of a major US bank spurred a flight to haven assets. The failure of Silicon Valley Bank, combined with a sharp drop in Treasury yields and dollar weakness, has been a boon for bullion. Its 2.4% jump on Monday was the largest since November. The greenback rose for the first time in four sessions on Tuesday, weighing on the precious metal.
  • After the back-to-back collapse of three smaller banks, their biggest US counterparts are seeing a rush of depositors fearful the crisis will spread. JPMorgan Chase & Co., the largest US bank, alone received billions of dollars in recent days, and Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. are also seeing higher-than-usual volume, according to people with knowledge of the matter. Representatives for the firms declined to comment or didn’t respond to messages. “The top six banks in the US are and have been too big to fail, the financial crisis over 10 years ago demonstrated that,” Michael Imerman, an assistant professor at the University of California Irvine’s business school, said in an interview. “So it’s safer to go with a name with higher degree of certainty.” Silicon Valley Bank’s seizure Friday, the biggest US bank failure since the financial crisis, was precipitated by fleeing depositors and sent shock waves across the global financial system. Regulators took measures to shore up deposits Sunday, in conjunction with an announcement that Signature Bank failed. Both collapses followed the news last week that Silvergate Capital Corp. would wind down.
  • Global bond markets have declared that the steepest global monetary tightening campaign in a generation is as good as done. Benchmark short-end bond yields have crashed below their economy’s cash rates across most of the developed world in the few sessions since the collapse of Silicon Valley Bank. German two-year bund yields tumbled 22 basis points on Tuesday to 2.47%, becoming the latest major bond market with yields under the relevant central bank benchmark. US two-year yields have led the way this week with their biggest decline since the 1980s, tumbling more than a percentage point in the space of three days as traders moved to price in two Federal Reserve rate cuts within six months. Similar-dated yields across every developed-market economy outside Japan all dropped at least 39 basis points.
  • President Joe Biden will announce a new executive order intended to reduce gun violence on Tuesday during a visit to the location of the mass shooting in Monterey Park, California, in January, according to a senior administration official. The president is evoking the limited authority of the executive branch to edge the country closer to universal firearms background checks, something that he has been unable to get through Congress although it remains popular in voter surveys. His order directs Attorney General Merrick Garland to pinpoint gun sellers who are not employing background checks now on the books, or may be evading them intentionally.
  • Russia was able to save abroad about a third of the $227 billion windfall earned last year from its commodity exports, creating a potential new flashpoint as the US and its allies look to tighten their sanctions over the invasion of Ukraine. About $80 billion is scattered across holdings of cash, real estate and investments in affiliates abroad, according to a Bloomberg Economics estimate. The stash amounts to shadow reserves, a byproduct of a record current-account surplus — roughly the difference between exports and imports — that helped sustain the Kremlin’s finances since its attack on Ukraine in February 2022.
  • The UK labor market showed some signs of cooling as wage growth slowed for the first time in more than a year. Average earnings growth excluding bonuses fell to 6.5% from a year earlier, the Office for National Statistics said Tuesday. That’s down from a record outside the pandemic of 6.7% in the previous three-month period. Job vacancies fell 51,000 in the quarter through February. The figures suggest an unprecedented series of Bank of England rate increases over the past year is starting to be felt in the labor market, where acute shortages of workers have driven up wages and fanned inflation. The apparent loss of momentum may encourage speculation that official borrowing costs are close to peaking.
  • President Biden appeared at a naval shipyard here on Monday afternoon with his British and Australian counterparts to announce a major new plan to supply Australia with nuclear-powered submarines in what amounts to a direct counter to China’s growing influence in the region. Standing with British Prime Minister Rishi Sunak and Australian Prime Minister Anthony Albanese, Biden unveiled details of the arrangement at a time of rising tensions with China and amid a global realignment that is triggering dramatic increases in military spending in the wake of Russia’s invasion of Ukraine. “We stand at the inflection point in history where the hard work of enhancing deterrence and promoting stability is going to affect the prospects of peace for decades to come,” Biden said, standing in front of a backdrop that included flags from each country and several submarines and naval destroyers at Point Loma in San Diego.
  • Treasury yields swung wildly Tuesday, a sign of traders’ heightened sensitivity to news on the health of the banking system ahead of key inflation data that may determine the Federal Reserve’s next move. Two-year yields took a huge round trip, initially climbing to 4.19%, then plunging to 3.82% before surging again to 4.27%. Nervousness in the wake of US bank collapses was reignited by Credit Suisse Group AG identifying “material weaknesses” in its reporting procedures, leaving the risk of contagion in investors’ minds. The sharp moves follow the biggest drop in the yield since 1982 on Monday, after the failure of Silicon Valley Bank and other US lenders led to bets the Fed won’t hike interest rates any further this year. Attention is now turning to US inflation figures due later for clues on what policymakers may do at their meeting next week.
  • Apollo Global Management Inc. expressed interest in snapping up a book of loans held by Silicon Valley Bank, the California lender seized by federal regulators last week. Apollo, one of the world’s largest alternative asset managers, is among other investors looking to buy pieces of Silicon Valley Bank, according to people familiar with the matter. The bank had $73.6 billion of loans as of Dec. 31, 2022, but the size of the loan book Apollo is interested in couldn’t be determined. Apollo declined to comment.
  • Credit Suisse Group AG said that senior leaders of the First Boston investment banking spinoff will own as much as a fifth of that business if it proceeds with plans for an initial public offering. Employees would be awarded restricted share units in CS First Boston, which would vest three years after the offering and be subject to a further holding requirement, according to the Swiss bank’s annual report released Tuesday. The awards are also intended to cover payments to future senior hires. The First Boston spinoff is a centerpiece of the troubled Swiss lender’s restructuring efforts and an attempt to protect and grow its best-performing investment banking businesses, such as advising on mergers and acquisitions. The bank is working on a complicated overhaul after racking up huge losses and battling to retain top talent following a string of scandals.