Sentiment is mixed, as the Deutsche Bank selloff revived the banking stress on Friday.
The DBK shares fell 8% and its CDS spiked after the bank announced to redeem a tier 2 subordinated bond earlier.
The announcement was supposed to restore confidence regarding the bank’s balance sheet. But it revived a confidence crisis instead.
Despite the bank stress on both sides of the Atlantic, both, the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Swiss National Bank (SNB) haven’t refrained from hiking the interest rates over the past two weeks, weighing – not necessarily on the health of the banks’ balance sheets, but on worries regarding the health of the banks’ balance sheets.
Today, it appears that the banking crisis is more of a confidence crisis than a fact-based panic – as it was the case in 2007 when banks really had a bunch of toxic assets in their balance sheets.
But confidence is the bread and butter of the banking sector. And watching the 166-year-old Credit Suisse go under did no good to anyone last Monday.
And even though Mr. Powell, Madame Lagarde, Mr. Bailey and Mr. Jordan kept their policy stance unchanged despite the mounting stress in banks, if other banks, the size of Deutsche Bank, get sucked in this confidence crisis, we could well see the interest rate expectations point more seriously at a pivot in major central banks’ tightening plans.
In numbers
The German 2-year yield fell on Friday, on DBK stress, and the US 2-year yield tanked to 3.55%, the lowest since last September.
Activity on Fed funds futures gives more than 85% chance for a no rate hike in May.
Besides the Fed, the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) are also seen as central banks that could rapidly go back to cutting the interest rates.
And the ECB could well be next on that list.
The EURUSD got hit with the freshly emerging DBK stress on Friday, the pair fell to 1.0713 on Friday, after it was preparing to flirt with the 1.10 offers last week, on the back of persistently hawkish ECB and increasingly dovish Fed expectations.
But if stress over DBK gets worse, we could well see the ECB rate hike expectations hammered. And that could put the single currency under a renewed downside pressure.
Of course, the dovish swing in major central bank expectations, except for the Bank of Japan (BoJ) which cannot go more dovish than it already is, are supportive for the Japanese yen – not because the yen is a safe haven currency but because the dovish other central bank expectations simply reduce the gap between the BoJ and the others. The USDJPY is testing the 130 support to the downside, and could clear it sustainably depending on how much more stress is waiting the market in the next few days, and weeks.
If you are looking for the best performing assets of the bank crisis, I’d say, consider gold, which gained almost $200 per ounce since the SVB collapsed, and Bitcoin, which gained around $10K during the same period.
And that equity appetite?
For equities, it looks like the falling yields overweigh the recession fears right now, even though the yields are falling due to recession worries which are triggered by the banking crisis which should restrict credit.
It is therefore a bit surprising to see the stock indices navigate this well the bank turmoil.
Yes, the Stoxx 600 lost 1.37% on Friday thanks to DBK, and yes the S&P500 looked ugly on Friday’s open, but the index closed the session 0.56% higher, above the 200-DMA.
And US and European futures point at a positive start to the week.
Besides the banks?
Besides the banks, we will still keep an eye on a couple of important data points this week, including the latest GDP and PCE update from the US, fresh inflation estimate for the Eurozone, Australia and Japan.
But how much they will matter depends on what happens on the… banks front.
