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Wall St major indexes volatile, S&P last up 0.4%
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Banks under massive selling pressure after three failures
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Euro STOXX 600 index down >2%
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Dollar lower; crude down 1%; gold up ~2%; BTC= up >20%
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U.S. 10-Year Treasury yield collapses to ~3.46%
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FED FUNDS/TWO-YEAR YIELD INVERSION REFLECTS CLOUDY FED
OUTLOOK (1050 EDT/1450 GMT)
The dramatic drop in U.S. Treasury yields as investors seek
out safe havens in the aftermath of three U.S. bank failures in
the last few days has inverted the curve between the fed funds
rate and two-year Treasury yields and clouded the outlook for
Federal Reserve policy.
Two-year yields dropped as low as 4.00% on Monday
and are down from a more-than-15-year high of 5.08% last
Wednesday. They are now trading 57 basis points below the fed
funds rate at 4.57%.
Such a move “has historically marked the end of the
post-hiking Fed pause; certainly not a dynamic consistent with a
Fed poised to deliver several more hikes before arriving at
terminal,” Ian Lyngen and Benjamin Jeffery, interest rate
strategists at BMO Capital Markets, said in a note on Monday.
Fed funds futures traders now see the Fed as equally likely
to leave rates unchanged or hike rates by 25 basis points at its
March 21-22 meeting, after pricing for a 50 basis points rate
increase just last week. Traders also again expect rate cuts in
the second half of the year, with the fed funds rate expected to
fall to 4.06% in December. Fed Chairman Jerome Powell said last week that the U.S.
central bank might reaccelerate the pace of rate hikes as it
battles still high inflation and benefits from a still strong
employment picture.
“The most relevant question of the moment is whether the
banking sector stresses are enough to prevent Powell from hiking
next week. The Fed has previously been clear in the stance that
investors should anticipate fallout from the cumulative
tightening of financial conditions and, despite the solid start
to 2023 for the real economy, the path to a soft (or even no)
landing was comparatively narrow,” BMO said.
However, “the simple fact the damage has hit the banking
sector complicates the calculus for the Fed. Said differently,
in the event the Fed pauses, it will be due to the potential for
broad-based banking contagion,” they added.
Bank shares tumbled on Monday as the United States' move to
guarantee the deposits of the collapsed tech-focused lender
Silicon Valley Bank failed to reassure investors that other
banks remain financially sound.
(Karen Brettell)
*****
BANKS LEAD DECLINES AS INVESTORS FLEE AFTER THREE FAILURES (1010 EDT/1410 GMT) Wall Street's major averages were gyrating around flat early on Monday after a third U.S. bank failed over the weekend and investors sold off bank stocks as they worried whether more weakness would be uncovered in the financial system.
State regulators closed New York-based Signature Bank on Sunday, two days after California authorities shuttered Silicon Valley Bank, owned by SVB Financial and Silvergate Capital's announcement on Wednesday that it would have to wind downits operations. With concern spreading after the closures, U.S. President Biden tried to reassure the public saying the administration's actions to help depositors in SVB and Signature should give Americans confidence that the banking system is safe. "Things are moving at warp speed. The market seems to think there is going to be more stress. The question is at what point do they become self-fulfilling? When you start seeing lines outside of banks," said Christopher Mcgratty, head of U.S. bank research at Keefe, Bruyette & Woods in New York
"I've seen this narrative play out in 2008 and markets can be unwound fairly quickly."
While the S&P 500 was down 0.3% the benchmark's bank index tumbled 7.3% with the biggest decliner First Republic Bank , which was down 74.3% after already losing 33% of its value last week. The best performer in the index was JPMorgan which was down 0.9%.
Regional banks were bing hit hardest with the KBW regional bank index down 11.2%. If there was any consolation to be had it was that traders were pulling back expectations for Federal Reserve rate hikes. Here is a snapshot of indexes at 1006 AM EST:
(Sinéad Carew, Medha Singh)
*****
BANK BLOODBATH: WILL THIS BE THE VOLATILITY EVENT? (0845
EDT/1245 GMT)
U.S. equity index futures are in negative territory on
Monday in volatile trade.
At one, point, e-mini S&P 500 futures were up about
2%. However, that rise has evaporated, and the futures are now
off around 1%. Bank shares remain under pressure. The SPDR S&P
Bank ETF is quoted down around 6%.
With this, the U.S. 10-Year Treasury yield is
collapsing, and the CBOE market volatility index is
jumping back to the 30.00 area, hitting its highest level since
October 24.
Since peaking early on in the bear market at 38.94 in late
January of last year, the market's "fear gauge" has consistently
made lower highs:
Many market watchers have been looking for a volatility
event leading to capitulation to call a market bottom, and
perhaps rightly so. With this, they are expecting a wild spike
higher in the VIX, to extreme levels, to signal the end of the
decline.
Of note, however, the pattern which is already in place of
lower VIX highs against lower SPX lows can also potentially fit
with a bottoming process.
Looking back from 1996 to 2020, on an intraday basis, there
were 12 major S&P 500 declines: six corrections (-10% to -20%)
and six bear markets (-20%+). In only four of those instances
(33% of the time), did the day of the VIX intraday high coincide
with the day of the S&P 500 intraday low. In other words, in a
sign of complete capitulation, the VIX topped the same day the
SPX hit its low.
In eight instances (67% of the time), the VIX intraday high
occurred ahead of the S&P 500's intraday low. In fact, on
average, on the day of the SPX's ultimate low, the VIX high that
day was around 86% of its highest print seen for the decline.
Additionally, in terms of time, on average, the high in the
VIX occurred around 77% of the way through the decline.
Therefore, one could argue that more often than not, the SPX
bottomed past the point of "maximum fear," when the market was
gripped with a sense of "despair."
Admittedly, the current decline from a record high has only
produced a maximum VIX intraday high of 38.94, which is well
below the average maximum high of about 51 in prior declines.
Thus, there still might be a crescendo of panic ahead.
(Terence Gabriel)
*****
FOR MONDAY'S LIVE MARKETS POSTS PRIOR TO 0845 EDT/1245 GMT - CLICK HERE
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
