SMU (2023-03-12): Bankrun to the Hills
Past Week’s News:
- US: Non-farm Payroll 311k (previous 517k)
- US: Unemployment 3.60% (previous 3.40%)
- Euro Area: GDP (2022 final) 3.5% (previous 5.3%)
- China: CPI 1.0 (previous 2.1)
- China: PPI -1.4 (previous -0.8)
Market Sentiment:
In the past week, pessimistic markets turned scared after the bank failure of Silicon Valley Bank, which reminded us that the system has taken a beating this past year, and might be more fragile than expected. However, what is important to keep in mind is that SVB is a relatively small bank in the US, and its main sector has been tech. So, even though it is the second-largest bank failure in US history, it might not be an indicator for the rest of the banks. This weekend, Yellen has spoken and said that depositors’ money is safe, and tries to avoid a bank run. We will see how this plays out next week.
Either way, the markets thought differently and flushed before the weekend. Fear vs Greed is down to 45 which is a huge drop from last week’s 71. Interestingly, we see that retail is increasing its net long position in SP500. Besides this, the average index is down -3.0% with SP500, Nasdaq, and HangSeng at the bottom. However, if we look at YTD all indices but HangSen is up, and the average is +5.12%.
Even though the volume is still stable, VIX spiked to almost 25, meaning there is a general worry in the market and we have to see if the weekend is enough to calm down or if this will continue next week.
Also, worth mentioning is the non-farm payroll and US unemployment numbers, which came in strong. Non-farm surprised with almost 100k above expectation, however, this surprise was smaller than the last, so it was taken fairly lightly. What is worth noting is that these numbers came in strong, which gives the FED room for more rate hikes, and this should be taken into account when looking into the rest of this year.
- This Week’s Fear vs Greed 45%
- Last Week’s Fear vs Greed 71%
- SP500 Net Long 56.5%
- Last Week’s SP500 Net Long 50%
- EUR/USD Net Long 46%
- Last Week’s EUR/USD Net Long 54%
- Gold Net Long 69%
- Last Week’s Gold Net Long 70%
Indices: 200LB & YTD
Market Update: Indices
Comment: Indices
- The cool-off continued since last week with an extra flush down this Friday due to SVB. This begs the question if this is the catalyst that will end the bear market rally, or is it simply just a flush to cool off and then continue to grind up?
- Next week is going to be crucial, and we should keep an eye on US CPI that is released on Tuesday. This might calm the markets or escalate the downturn. Right now it is an either-or situation. However, I believe that the markets will shrug off SPV, but if we see another bank do the same, then it is a pattern and we should expect a bigger collapse. Otherwise, it is all eyes on FED and how they will act.
US Sectors & Industries
- The flush down left no sector untouched. All sectors are down about -4.9% (average) with financials and clean energy at the bottom.
- Zooming out YTD sectors are up an average of 2.55%, however, this might change quickly depending on how next week plays out. Here, be ready with more defensive sectors and try to avoid those with high volatility, unless you plan to trade, but then be careful.
Market Update: Rates
Comment: Rates
- The Yield inversion (10Y vs 2Y) was down at a 42-year record, however, have now spiked up as most rates came down last week. Now, the chock from Friday should not keep the eyes off the strong NFP and unemployment numbers that came in. This gives room for the FED to hike rates further, and if they do, then rates will obviously continue up.
Market Update: FX
Comment: FX
- The downturn in rates and the US financial sector also affected the USD. It became stronger against CAD, NZD, AUD, and SEK. However, did not have too much effect on EUR/USD, and weaker against JPY.
Market Update: Commodities
Comment: Commodities
- Not that much to add since last week, except for Gold keep coming up, while other industrial metals have stagnated and driven in different directions.
- Oil and cotton continue with stabilizing their bottoms, and depending on what happens with the other markets this spring, they should break on the upside. However, what has started to come down, which is interesting. We should keep an eye out for what farmers say regarding this year’s harvest.
- Natural gas free fall might have stopped. It did spike up and is now building what might be the start of a range to stabilize a bottom. My theory is that NaturalGas should go up this spring, so this might be the start of the pivot.
Summary:
- Markets have come down a bit, mostly due to the chock from SVB. Is it a cool-off or a catalyst that will end the bear market rally that has lasted since October 2022?
- Yield curve inversion celebrated 42 record low, and depending on FEDs reaction to the strong NFP, and this week’s US CPI, we might see further increase in rates (although they have come down this week)
- USD has been strong against most of its pair, except EUR and JPY.
- Gold has come up a little. Oil and cotton are accumulating in a bottom range and are charging to go up. Wheat has come down, and natural gas has paused its free fall and might have started a range to stabilize a bottom.
Next Week:
| Day: | Country & Indicator |
| Monday | – |
| Tuesday | US: CPI; UK: Unemployment |
| Wednesday | US: Retail, PPI; Euro Area: Manufacturing |
| Thursday | US: Housing Starts |
| Friday | US: Consumer Confidence (prel); Euro Area: Inflation (HICP) |