The Daily – March 15, 2023

March 15, 2023

Daily Market Commentary

World Headlines

• Europe’s Stoxx 600 equity benchmark fell more than 2%, with a gauge of banks plunging as much as 6%. Credit Suisse shares slumped 21% after its top shareholder ruled out more assistance, while the cost of default insurance on the Swiss lender’s short-term debt approached distressed levels. Some voices are now also calling on the European Central Bank to reconsider its policy path. The central bank is seen tightening by 50 basis points on Thursday, though former Executive Board member Lorenzo Bini Smaghi said policy makers should either delay or pare back the increase to avoid a policy error. Germany’s two-year yield resumed a decline, falling 25 basis points.
• Fresh turmoil at Credit Suisse Group AG roiled European bank shares and dented sentiment in the US futures market as investors remain on edge after last week’s regional-bank failures. Treasuries turned higher on haven demand. Contracts on the S&P 500 sank more than 1%, indicating Tuesday’s rebound won’t persist as overnight gains in regional banks faded. The index plunged more than 3% at the end of last week after Silicon Valley Bank’s demise before stabilizing on the government rescue. Citizens Financial Group Inc. and US Bancorp lost at least 3% in early trading, dragging down shares in larger lenders including Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. Renewed jitters in the banking sector are complicating the task for policy makers still facing inflation pressures while having to ensure stability of the financial system. Swaps pricing is back to positioning for the Federal Reserve to lift rates by a quarter percentage point next week after the odds of an increase had slipped to nearly 50-50 on Monday.
• Most banking stocks rose across Asia Pacific as concerns over a broader fallout from Silicon Valley Bank’s sudden collapse eased. The MSCI Asia Pacific Financials Index advanced as much as 2% to lead sectoral gains in the region, snapping three days of losses triggered by the troubles at SVB and Signature Bank. Japanese shares dominated the leaderboard, as the Topix Banks Index surged as much as 4.6%, partly reversing its 16% drop over the past three sessions.
• Oil extended its decline to a three-month low as traders weighed signs of an economic rebound in China against the outlook for weaker demand amid US banking sector turmoil. Brent crude futures erased early gains after data that showed stronger Chinese consumer spending, industrial output and investment after coronavirus restrictions were dropped. The International Energy Agency’s monthly Oil Market Report struck a more bearish tone, forecasting that world oil supply should “comfortably” exceed demand in the first half before tightening later this year. The market is also facing another interest-rate hike from the Federal Reserve next week after US inflation gained, despite the impact on the financial industry from the collapse of Silicon Valley Bank.
• Gold reversed an earlier loss and copper dropped to a two-month low as turmoil at Credit Suisse Group AG added to heightened concerns about the global finance sector. Bullion rebounded above $1,900 an ounce as Treasury yields plunged and investors sought haven assets. Credit Suisse’s top shareholder said it won’t invest any more in the troubled Swiss bank for statutory and regulatory reasons, causing the bank’s stock to plunge. Spot gold added 0.3% to $1,908.83 an ounce as of 11:26 a.m. in London, after earlier slumping as much as 1%. The Bloomberg Dollar Spot Index strengthened 0.8%. Silver edged higher, while platinum and palladium fell.
• BlackRock Inc. Chief Executive Officer Larry Fink said the banking crisis could worsen beyond the failure of Silicon Valley Bank, worrying aloud about cracks in the financial system that formed during more than a decade of easy money and low interest rates. “Are the dominoes starting to fall?” said Fink, chairman of the world’s largest asset manager, in a letter on Wednesday. “It’s too early to know how widespread the damage is.” Fink said that some banks will probably need to pull back on lending to shore up their balance sheets and that regulators are likely to impose stricter capital standards. The economy and financial system is entering a new period, Fink said, with inflation elevated and the Federal Reserve continuing to raise rates. Fink said inflation is likely to stay close to 3.5% or 4% in the next few years.
• Bank of America Corp. mopped up more than $15 billion in new deposits in a matter of days, emerging as one of the big winners after the collapse of three smaller banks dented confidence in the safety of regional lenders. The inflows offer a first glimpse into the deluge of deposits that made its way to the country’s largest banks as customers fearful of a spreading crisis sought refuge in the firms seen as too big to fail. The money flowing into the second-largest US bank was described by people with direct knowledge of the matter, who asked not to be identified as the information isn’t public.
• Ukraine won a significant boost in its attempt to set aside a $3 billion defaulted bond after the UK Supreme Court ruled that judges need to consider the backdrop of Russia’s campaign of threatening behavior in the run-up to the annexation of Crimea. Britain’s top court declared that a judge should pore over Russian attempts to strong-arm Ukraine into issuing the bond, giving the green light to a full-blown London trial. The long-awaited decision allows Ukraine to argue that the bond, sold in 2013 on the eve of the revolution in Kyiv, was part of unlawful political and military aggression from Moscow. Ukraine’s push to postpone debt repayments has already won support at an international level from key government creditors as well as private bondholders. Ukrainian officials have since been exploring ways to restructure the nation’s debt as funding options dry up, with Russia’s invasion destroying industry and depleting foreign reserves.
• The UK has kept its energy price guarantee at current levels for a further three months, easing pressure on households as the government works to ensure bills reflect falling natural gas costs. The EPG will remain set at £2,500 ($3,037), the Treasury said Wednesday. That means dual-fuel tariffs will stay stable until July, though customers will still be paying almost double what they were charged two years ago. The government moved to prevent an expected £500 increase in annual energy costs for consumers in April. Goldman Sachs Group Inc. has said keeping the EPG unchanged will help UK inflation ease to 1.8% later this year from more than 10% now.
• An abrupt suspension of widely used bond price feeds in China blindsided investors and sent volumes in some corners of the market tumbling, reviving concern about sudden regulatory shifts in a country that makes up a growing portion of global fixed-income portfolios. Information providers that previously supplied aggregated bond quotes showed blank screens, prompting desperate traders to turn to chatrooms available on Tencent’s QQ and WeChat to share prices and do deals. There has been no official explanation for the sudden halt in data feeds considered by traders to be essential to the functioning of the 145 trillion yuan ($21 trillion) market, the world’s second largest. Fixed-income brokers failed to respond to requests for comment, as did the regulator, which Reuters reported was behind the decision.
• Credit Suisse Group AG’s top shareholder, whose stake has lost more than one-third of its value in three months, ruled out investing any more in the troubled Swiss bank as a bigger holding would bring additional regulatory hurdles.  “The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” Saudi National Bank Chairman Ammar Al Khudairy said in an interview with Bloomberg TV on Wednesday. That was in response to a question on whether the bank was open to further injections if there was another call for additional liquidity. Credit Suisse fell as much as 25% to a new record low in Zurich, while the cost to insure the bonds against default in the near term approached a level typically signaling serious investor concerns.
• The collapse of Silicon Valley Bank threatens to further besmirch the reputation of Federal Reserve Chair Jerome Powell, on top of the blemish he’s suffered for being slow to recognize the risk of rampant inflation. Friends and foes of the Fed alike have faulted the central bank for not heading off the troubles at the nation’s 16th-largest lender before they blew up into a crisis that shook the financial system and prompted extraordinary steps by policymakers over the weekend to contain it. A number of lawmakers and central bank watchers are criticizing the Powell-led Fed board for wholeheartedly signing on to a Republican-driven agenda in 2018 to loosen regulation on banks smaller than behemoths such as JPMorgan Chase & Co. and Bank of America Corp. They argue that Powell and his team at the time — some of whom have since left the Fed — are at least partly responsible for the problems at SVB.
• The rate on repurchase agreements for dollars, a key funding market, moved higher Wednesday amid the ongoing turmoil in global banks and concern about some institutions’ ability to access cash. The general collateral repo rate first traded with a bid-ask spread of 4.67%/4.66%, according to ICAP. That was around 4.45% by the end of Tuesday, although it first traded at around 4.60%. At one stage it was around 4.70% Tuesday, according to Curvature Securities. Investors are zeroing in on key parts of the market for short-term dollar borrowing to determine if and how signs of systemic stress might be emerging after the biggest US bank collapse in over a decade. The failure of Silicon Valley Bank has stirred concern additional banks might also be in danger of a funding shortfall.
• Tesla Inc. was sued by customers who claim they’ve been forced to pay exorbitant prices and endure long waits for car repairs due to the company’s monopolization of replacement parts and maintenance services. The proposed class action was filed Tuesday in San Francisco federal court on behalf of Virginia M. Lambrix, who lives in Sonoma County and owns a Tesla Model S. She says owners of traditional combustion engine cars have multiple options for maintenance and repairs, or do the work themselves. Those repairs can rely on parts from the original manufacturer or parts made by other companies, according to the complaint. Tesla owners, on the other hand, have just one option: getting their cars serviced by the company or a network of Tesla-approved service centers using only Tesla parts, according to the complaint, which cites federal antitrust laws. Lambrix argues the limitation is due to Tesla leveraging its market power to restrain repair and maintenance services.
• It’s still cheaper to raise money through ESG debt, according to an industry standards setter, wading into a debate over whether a much-vaunted advantage remains for the $6 trillion industry. Bonds bearing a green, social, sustainability or sustainability-linked tag were all cheaper for borrowers than issuing conventional debt in the second half of 2022, according to analysis by the Climate Bonds Initiative, which expects this pricing edge to persist. That’s a view setting it apart from some recent research, such as a Goldman Sachs Group Inc. analysis that found there was no difference in funding costs between conventional debt and bonds linked to ESG efforts. A BloombergNEF report in December found the so-called greenium peaked in 2020 before reversing in 2022.