Investors want to know.
How well rooted is this particular bank problem? Will depositors gravitate towards the perceived safety, whether or not this is the reality of large, US money-centre banks?
How will the net interest margin, which was already becoming a problem, behave going forward?
The US Treasury yield curve remains badly inverted, despite the sudden strength and safety (again, supposedly) of US paper.
The spread between US 10-year and 2-year notes progressed on Friday:
But the yield spread between the 10-year note and the 3-month T-bill is back to the deep negative lows of mid-January:
This could mean some tough sledding ahead for traditional bankers as well, who may be less reliant on trading or investment banking to turn a profit. This will drive businesses into fee-driven services such as wealth management.
The arrival of any impending economic downturn, of course, puts all bets off, as financials struggle (along with everyone else) to slow down.
what does it all mean
Fed funds futures are highly volatile and are still being priced. On Monday morning, I now see a 60/40 probability profile for a 25 basis point rate hike on March 22, so that the fed funds rate drops from 4.75% to 5%, then, that’s it. That’s the final rate, at least for now, having come down to 5.75% from 5.5% last week. These futures markets are now pricing in a rate cut till the September 20 meeting.
business of this mess
One important thing to remember is that you don’t need to trade financials right now unless you are already deep in the action.
As regular readers are well aware, I’ve been at two money-center banks known for their traditional home banking businesses. I haven’t touched regionals in a while, that seem smarter than they used to be. I didn’t really like what I liked.
I was asked on Friday last week whether I would be ready to buy back the stake I had sold in those two banks. I didn’t take that action on Friday, I’m glad I removed half my risk, and sad I didn’t sell more.
Given that I still have some risk appetite and given that both these stocks are coming off key support, they will continue to be my focus. Even if I add back some shares, to successfully remove capital (trade) around an adverse event, I don’t see myself building these positions back to full strength. .
The support level for Bank of America is near $29. The spot was tested and held back in both October and July. I’ll sell a quarter of what I sold last week for $29 or so.
My panic point for BAC is 27.25 because that would be where I am down 8% on the balance of my position (I made 8% last week) and would leave me with an overall breakeven trade.
$37 is where I can break even, but I think I’ll have to give $36.50 a chance if it gets there. Should that level be cracked, I’m history at $36, and I’ll take a small loss.
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