By Jamie Chisholm
Critical information for the U.S. trading day
Markets are in a bit of a funk again. To the tension generated by recently surging bond yields and a crucial jobs report, we can add a seemingly old-fashioned bass-slapping wobble about bank contagion.
Yet, study the dollar. As shares in SVB Financial Group (SIVB) cratered Thursday, and sparked a landslide across the sector, the buck , normally the primary haven at times of intense angst, did not rally.
Does this mean traders think the funk is U.S.-centric and should thus damage the dollar? Or does it imply we are not anywhere near George Clinton levels of planetary funkiness and so a rush to the greenback is not required?
Goldman Sachs thinks the latter and is playing the easy-listening music.
In a note published late Thursday, the bank said problems illustrated by SVB are "idiosyncratic, not systemic."
Goldman’s credit-strategy research team, led by Lotfi Karoui, recognizes there is, of course, a problem for SVB and others caused by the sharp inversion of the bond curve, a move triggered by the Federal Reserve’s rapid hiking of interest rates to suppress inflation.
"To put things in context, and leaving aside the global financial crisis, [Thursday’s] move lower in the equity bank sector index is the third largest of the last 25 years, after the 2020 COVID period and August 2011 in the wake of the U.S. government rating downgrade," said Goldman.
Smaller, regional banks were particularly badly hit. But shares of big U.S. banks and those of foreign banks with large U.S. operations, known as yankee banks, performed relatively better, and Goldman said: "We reiterate our overweight recommendation on the sector and would use any large selloff as an opportunity to add risk."
It gives three reasons for this call.
First, strategists believe the risk of debt contagion from the small banks to big ones is remote, given the low share of regional banks in the investment grade, or IG, index.
"[W]hile the banking sector does make up a large share of the USD IG market at 25% of the notional outstanding, regional domestic banks only make up 6% of the banks sector, or about 1.5% of the broader USD IG market."
Second, Goldman says the regional banks’ low share is itself "quite diversified, with 15 issuers and no one issuer accounting for more than 20% of the notional outstanding."
Third, big banks are more robust following tougher regulation over recent years.
"[W]e think the risk that large U.S. or Yankee banks experience a capital or liquidity event driven by assets/liabilities mismatches or concentrated positions on securities portfolios is remote, considering the post-global financial crisis regulatory environment."
Now, there will be skeptics noting that a big bank is predisposed to claiming that big banks will be fine. Yet some commentators are sufficiently convinced that this latest episode is merely an obscure subgenre of crypto/VC funk that even the regionals are attractive.
Kevin Muir, who writes the Macro Tourist blog, said he plans to open a large overweight position in the S&P Regional Banking exchange-traded fund on Friday. "I think this indiscriminate bank selling is overblown and is the result of Great Financial Crisis scars," he says.
"Of course, there are losses from the Fed’s aggressive policies sitting on banks’ balance sheets, but, on the whole, banks are not as foolish as the market believes. Just because two overly aggressive tech banks [SVB and Silvergate (SI)] got themselves into trouble doesn’t mean the whole sector is tainted. The market always hedges for the last crisis, and I am willing to bet that banks aren’t the source of the next crisis," said Muir.
Wall Street is in line for a slightly firmer session with S&P 500 futures up 0.2%, and Dow futures adding over 10 points following jobs data that lifted futures off lows. Benchmark 10-year Treasury yields slid 13 basis points to 3.786%. The dollar index is down 0.1% and gold is up 0.1% to $1,835.90 an ounce. Bitcoin is under $20,000.
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It’s jobs Friday again — delayed a week because last week March crept up a bit fast for some! A net 311,000 positions were created in February, beating forecasts of 205,000. The unemployment rate was expected to say the same at 3.4% but rose to 3.6%, and average hourly wage growth was 0.2% against a forecast of 0.4%.
Oracle shares (ORCL) are off nearly 4% in premarket action after the software group’s results contained disappointing revenues.
Former work-from-home darling DocuSign (DOCU) delivered better-than-expected results after Thursday’s closing bell, but its shares are down more than 10% in the premarket.
Bank of Japan governor Haruhiko Kuroda surprised no one by keeping monetary strategy unchanged, and ultraloose, at his last policy-board meeting before handing over the reins to Kazuo Ueda in April.
The pound is firmer after data showed the U.K. economy grew by 0.3% between December and January, beating the consensus forecast of a 0.1% expansion, with activity helped by the return of Premier League soccer after the World Cup.
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