☀️☕️ Bank stocks drop… Will interest rates drop too?

Happy Tuesday!

Market Roundup 📊 14-Mar-23

US large-cap S&P 500 closed 0.15% DOWN 🔻
Tech-heavy Nasdaq Composite closed 0.45% UP ▲
Pan European STOXX Europe 600 closed 2.42% DOWN 🔻🔻
HK’s Hang Seng Index closed 1.95% UP ▲
Japan’s Nikkei 225 closed 1.11% DOWN 🔻

— The MoneyFitt Morning (@MoneyFitt)
Mar 14, 2023

📝 Focus

Banks drop… Interest rates to drop too?

📊 In the Markets

And today, in SVB news… 

📖 MoneyFitt Explains

🎓️ What it means when something is “priced in”

📝 Focus

Banks drop… Interest rates to drop too?

Bank stock prices worldwide fell apart in the wake of the Silicon Valley Bank crisis, despite decisive action to avert contagion. A few short days ago, the fear was that high interest rates cause both realised and unrealised losses in banks’ securities portfolios, which could potentially leave their capital bases at risk in the event of a flight of deposits. These were SVB and Silvergate scenarios, obviously, compounded by several specific issues of their own making that led to their doom.

► Before that, high and rising interest rates were an awesome way for banks to grab even more money from your cost-of-living-crisis-burned wallet by paying you peanuts on your deposits while ripping out your eyeballs on your loans. But, the narrative went, the boomtime for banks would end soon as rates plateau a bit higher, as concerns mount that high interest rates would trigger an increase in loans going bad (Citi reported problems emerging in its credit cards) and possibly a recession (reflected in the inverted yield curve.)

► Now investors are starting to “price in” 🎓 financial stability risks and general worries ​​over the health of the financial system, pointing to the unintended consequences of central bankers’ ultra-focused inflation-busting policy of very sharply higher rates. Things always break when rates shoot up. SVB revealed some of the things that broke (triggered by its truly terrible balance sheet risk management… and its VC BFFs) and came not long after the UK pension system nearly collapsed (triggered by the truly terrible Liz Truss mini-budget.) Traders are wondering what’s next? So now the market suddenly seems to be looking at an interest rate scenario that’s no longer “higher-for-longer” but “not-as-high-for-not-as-long”… or maybe even just “down”.

…To my market-timing investment strategy? – Image credit: Everything Everywhere All At Once / A24 via Tenor

► Contracting a severe case of Headlinegrabbitis, Goldman Sachs was first out of the gate with a call for no change in interest rates at the Fed’s next rate-setting meeting on March 22nd, having previously expected a 0.25% hike. Japanese investment bank Nomura went one step further and is predicting a 0.25% CUT in “reaction to looming financial stability risks” due to industry-wide issues revealed by the SVB collapse, from confidently forecasting a 0.50% hike previously. (See below for where the futures markets went with this.)

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📊 In the Markets

Stock markets in the US closed Monday little changed after a turbulent 5 days starting with Wednesday’s folding of crypto-friendly Silvergate Bank. Thursday saw Silicon Valley Bank’s trading loss announcement, failed fund-raise and VC-fueled bank-run. Then Sunday had the coordinated rescue of SVB’s depositors to limit contagion (oh, and the third largest bank failure in US history, crypto-friendly Signature Bank). Now name another bank starting with the letter “S.”

► But under the surface of the headline indexes, traders implied from the SVB depositor rescue that the Fed may hold back on aggressive rate hikes. US 2-year bond prices surged with the yield (which goes the opposite direction) falling 57 basis points (0.57%), the biggest two-day drop since 2008, on an evolving view on the Fed’s next move and partly reflecting investors’ rush into safe-haven assets. This helped sentiment in tech, but banking stocks continued to slump… even Systemically Important Banks (“too big to fail”) like Citigroup and Wells Fargo. Both plunged over 7%, while Bank of America shed just under 6% as traders priced in lower lending rates and margins and general worries ​​over the financial system’s health. The selloff was even sharper in European banks, leading those markets sharply lower, and the US$ continued its recent slide (the flawed DXY index is now 9% below its recent Sep-22 peak.)

► And trading in interest rate futures was all over the shop, “saying” by early Monday evening (based on implied probabilities) that interest rates would peak at the May rate-setting meeting just 0.50% higher than where we are now and then have two (two!) successive interest rate cuts of 0.50%, and by the middle of next year be another 0.75% lower than that. The implied probability of a 0.50% hike is now 0.0%, down from about 70% last Wednesday. (So much for Fed Chief Jay Powell’s testimony to Congress less than a week ago, and assertions from his colleagues that there’d likely be no cuts this year.)

A lot can change in two days of futures trading. – Image credit: CME FedWatch Tool manually via The MFM

And today, in SVB news…

► The venture capital (VC) community that turned sharply on SVB and triggered (or at least accelerated) the run that killed it, is now looking a plan to make sure that at least parts of Silicon Valley Bank can keep serving clients in the tech startup sector, specifically lending to, investing in and advising the companies and their executives (i.e. a scheme to make money picking over the charred remains of its favourite banking bro.) General Catalyst, Andreessen Horowitz and Khosla Ventures are apparently among them, with possible funding from private equity giant Apollo and blast-from-the-past name Credit Suisse First Boston. Much finger-pointing and soul-searching (hah!) from those who did and didn’t instruct their portfolio companies to get their money out ASAP with the mindset of “if you’re going to panic, panic first.”

► Silicon Valley Bank’s SF-based rival in the startup space First Republic cratered 62% after a 19% crash on Friday on fears that its balance sheet risk management was as truly terrible as SVB’s and that its bros in the VC community would turn on it just as quickly.

“Americans can have confidence that the banking system is safe … Your deposits are safe … we will not stop at this, we will do whatever is needed.”

US President Joe Biden, in a White House statement

► Greg Becker, the now sacked (with worse to come) CEO of Silicon Valley Bank, sold US$3.6 million in stock at US$278 per share two weeks before the bank’s epic crash last week. Questions will rightly be asked about what he knew and when. But the fact that, in a back-to-back transaction, he exercised options to buy the exact same number of shares (at a much lower price of $105.18), he probably didn’t do anything illegal. He almost certainly DID know the bank was in trouble before his sale but probably didn’t know how much trouble, thanks to his hopeless balance sheet risk team and a VC community that turned on their erstwhile partner at Tweet-speed and triggered the bank run. (Not a legal opinion!)

► The ring-fenced UK arm of Silicon Valley Bank was sold on Monday to HSBC for the grand sum of £1, overriding the Bank of England’s initial decision to place SVB UK into insolvency, after the UK bank saw a run sparked by venture capitalists fears that its balance sheet was in trouble as much trouble as its US parent’s. The UK chancellor (finance minister) said, “Deposits will be protected, with no taxpayer support”, which is more accurate than the depositor rescue plan across the pond, which would indirectly cost taxpayers through higher deposit insurance charges on their banks. Authorities had been considering several options to help SVB UK’s depositors, including an emergency fund to support the tech and life science startup community. HSBC dropped 4% in London trading vs the FTSE’s 2.6% decline, though mostly from general fears about banks — Barclays and Standard Chartered, two UK banks which are about as totally different from one another as you can get, dropped by more than 6% each.

📖 MoneyFitt Explains

🎓️ Priced in

It’s rarely obvious what happens when news affecting a company or a market comes out. The most confusing thing is when something good happens to a company and the stock doesn’t shoot up. Sometimes it does nothing or even goes down. What happened?

We say in the market that the market has “priced it in” or that the news or results are “in the price” or “factored in”. This means that the current value of the improved future prospects is already reflected in the price. (An old market saying that can apply here is “buy on rumour, sell on news.”)

Inexperienced traders often see what IS positive news and buy. Thinking the fastest trigger finger will win, they often jump in without considering how much may have already been priced in. Sometimes you can’t tell if the news has been priced in until AFTER you see how it trades because the market comprises many players with different amounts of information and expectations.

Experienced investors are often caught off guard and surprised by news or results, too, despite their enormous resources, access to expert analysis, teams of researchers and gigantic salaries! Professional investors spend their entire careers trying to be brilliant at picking winning stocks or timing the market. Yet, many studies show that most do worse over the long term than “index-hugging” ETFs.

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