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Tuesday, March 14, 2023
today’s newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman, Read this and more market news on the go yahoo finance app,
It was a well-worn phrase as early as the 2007–2008 financial crisis: “What will be the next shoe?”
There were a lot of boots at the time: Bear Stearns. Countrywide Financial. Indymac. The takeover of Freddie Mac and Fannie Mae Govt. AIG. Washington Mutual.
(If you’re wondering, as I was, where “waiting for the other shoe to drop” originates, look no further than nyc houses,
No one is suggesting that the recoveries of Silicon Valley Bank and Signature Bank directly parallel the Great Financial Crisis. But it looks like those two banks’ troubles will be echoed elsewhere, and investors scrambled back and forth on Monday, trying to assess where the next risk would emerge.
One of the places they seemed to be concerned were regional banks whose shares fell, particularly First Republic Bank (FRC), even after that institution received additional liquidity from the Federal Reserve and JPMorgan. Sellers ignored that news.
Some strategists were looking for less obvious sources of tension in the system.
“Risk isn’t in what you can see, it’s what you can’t see,” Tony Dwyer, principal and chief market strategist at U.S. Macro Group’s Canaccord Genuity, wrote in a note to investors. He’s advising clients to look to the private markets for the next area of risk: “We believe investors reevaluate their private equity and venture portfolios to reflect the lower investment and recessionary environment.” There is an additional intermediate term risk.”
JPMorgan strategists went even further, drawing attention to all implicit or explicit carry trades. A carry trade This involves borrowing at a low interest rate and (ideally) investing in an asset with a high rate of return.
“Carry trades tend to develop during periods of cheap financing, such as we’ve had over the past decade, and especially during the COVID QE,” wrote the JP Morgan team, led by chief market strategist Marko Kolanovic.
He held a host of assets and investments in that category including commercial real estate; private equity; venture capital; and auto loans, leveraged loans and credit cards. As rates climb, in Kolanovic’s view, properties that look attractive when rates are low are a no-go.
All of this said, an individual bank implosion or another big shoe is not necessary for the fallout to occur in terms of systemic market vulnerability. There can be failures that are marginal without triggering a wider meltdown.
It could also potentially mean a more sustained period of risk aversion, as seen on Monday in real estate (XLRE) and utility stocks (XLU), and defensive sectors like gold (GC=F) (and very little) It is clear from the flight of investors. Classic ones, such as bitcoin (BTC-USD).
The one wild card, as always, is the Federal Reserve. Tuesday morning brought the latest inflation data for February in the form of the Consumer Price Index. Economists spent the weekend trying to gauge what the collapse of the SVB would mean for the path to an interest rate hike. Expect that game to change once again — dependent, of course, on Fed data — and a new wave of interest-rate probabilities.
That is, until and unless, another shoe drops.
what to watch today
economy
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consumer price IndexYear-on-Year, February (+6% expected vs. +6.4% in January)
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consumer price IndexMonth-on-Month, February (+0.4% vs. +0.5% expected in January)
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“Core” CPI, year-over-year, February (+5.5% expected vs. 5.6% in January)
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“Core” CPI, month-on-monthFebruary (+0.4% expected versus +0.4% in January)
Income
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