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Main U.S. indexes gyrate as Fed hikes 25 bps
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Real estate weakest S&P 500 sector; tech leads gainers
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Dollar down; gold, crude, bitcoin gain
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U.S. 10-Year Treasury yield falls to ~3.53%
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FED DELIVERS 25 BPS, U.S. STOCKS FIRM SLIGHTLY (1420
EDT/1820 GMT)
The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two U.S. banks.
The main U.S. indexes, which were all around flat in the
moments just prior to the release of the FOMC statement, have
firmed slightly since it came out.
For example, the S&P 500 , which was down 0.04% is now
up around 0.2% on the day.
Under the surface, among the biggest beneficiaries over the
last 15 minutes or so have been gold stocks .
Regarding the FOMC action, Brian Jacobsen, senior investment
strategist, Allspring Global Investments, said, "The Fed is
probably thinking financial stresses are substituting for future
rate increases. That’s why they no longer think 'ongoing
increases' are necessary, though 'policy firming' may be
appropriate."
Jacobsen added "The Fed is now living on a hope and a prayer
that they haven’t done irreparable harm to the banking system."
Markets now await Fed Chair Powell's press conference at 0230 pm EST. Here is a snapshot of where markets stood around 15 minutes or so after the release of the Fed statement:
(Terence Gabriel, Chuck Mikolajczak)
*****
2022 A RECORD YEAR FOR BUYBACKS -S&P DOW JONES INDICES (1232 EDT/1632 GMT) S&P 500 Q4 2022 buybacks ticked up, and with this, 2022 set a record. According to research from Howard Silverblatt, senior index analyst at S&P Dow Jones indices, Q4 2022 share repurchases were $211.2 billion, up 0.2% from Q3 2022's $210.8 billion, and down 21.8% from Q4 2021's $270.1 billion. For the 12-month period ending December 2022, buybacks were $922.7 billion, setting a new annual record, and up 4.6% from 2021's $881.7 billion. "Companies, led by Financials, continued to pull back from their 2022 Q1 record-breaking buyback expenditures, as energy remains the outlier, increasing its buybacks as it set record profits," said Silverblatt. He adds that "share count reduction continues, as almost one-in-five issues increased their year-over-year EPS by at least 4% due to buybacks." Silverblatt expects that impact to continue into 2023, even though economic indicators are unclear at this point. The five issues with the highest total buybacks in Q4 2022 were: Apple , Alphabet , Meta Platforms , Microsoft , and Exxon Mobil .
(Terence Gabriel)
*****
CANADIAN BANKS CAN SEEMINGLY BUMP SAFELY THROUGH THIS FINANCIAL FLU (1223 EDT/1623 GMT) The global financial system is two weeks into a banking rout beginning in the U.S., and yet across the north-American border the Canadian Stock index, out of which nearly 30% are financials, has been left largely unscathed. Between March 9 and March 17, following SVB Financial Group's share sale, the Canadian banking index lost nearly 6%, while the S&P 500 banks index lost a whooping 16%. A couple of analysts believe that investors largely see the Canadian financial system as more robust compared to their U.S. peers. "The Canadian banking system is more regulated with a tighter oversight. The lenders have always held a little more capital on their books and they're all very well diversified," said Denis Taillefer, senior portfolio manager at Caldwell Investment Management. Analysts at Scotiabank also echo the diverse depositor base among Canadian banks which they believe can act as a hedge against run-downs or unrealized losses.
In response to the stresses in the banking sector, Canada Deposit Insurance Corporation (CDIC) is reviewing deposit insurance limits to safeguard the country's financial system, according to the Bank and Trust Companies Association. However, Scotiabank analysts warn that considering the spillover effect from the U.S. economy, there are slim chances of avoiding a recession. It must be noted on a monthly basis the Canadian economy is in contraction as of December last year.
(Johann M Cherian)
*****
EXAMINING THE STRESS ON BANKS (1204 EDT/1604 GMT) After a wild two weeks for U.S. banks, Goldman Sachs analysts published research late on Tuesday outlining what we know, what we don't know as well as their own assessment of the extent of stresses in the financial system. First GS says that deposits have likely continued to flow from smaller banks to larger banks since some small banks have acknowledged outflows "though it is hard to know to what extent" and inflows into money market funds are at several times the usual rate. Then they note that banks have been boosting liquidity by borrowing heavily from Federal Home Loan Bank and to a lesser extent the Fed's new bank term funding program. Also declining balances in the Fed's reverse repo facility suggest a liquidity move to banks. While some of the borrowing stems from deposit flows GS suggests "some is precautionary borrowing by healthy banks."
It also takes some encouragement from internet search data, which shows that public focus on banks thought to be under stress had faded over the last week with a focus on withdrawing funds appearing to fade too.
But while funding markets are giving banks access to needed liquidity, some with meaningful deposit outflows would face higher borrowing costs as they have to replace deposits with other funding sources.
And they noted that regional bank equity prices rebounded on Tuesday, they were still down for March, reflecting ongoing investor concerns about small and midsize banks. One issue seems to be that investors are left with information gaps as GS notes that only regulators can see deposit outflows from individual banks in real time. Banks typically just report deposit levels in quarterly reports, due in April while the FDIC only releases bank-level info in May. But the Fed's H.8 release will likely be more closely watched that usual this Friday as it will include total deposits at small banks, meaning those outside of the top 25, through March 15, giving the first quantifiable view of stress on the system last week.
Some banks made disclosures about their deposit levels, like Pacific West , which said Wednesday that they'd fallen 20% since Dec. 31 at the same time as it announced it had raised $1.4 billion from investment firm Atlas SP Partners. The bank's stock is down 10.2% after the disclosure, making it the biggest percentage loser in the S&P 400 bank index , which is down 1.6%.
Meanwhile, the S&P 500 banks index is down 1.5% on the day with Comerica , the leading decliner in that index, down 4.5%. First Republic Bank , one of the banks which has been most battered by the crisis, is down 3.7%. The benchmark S&P 500 is roughly flat.
(Sinéad Carew)
*****
EM WILL NOT KEEP YOU SAFE (1128 EDT/1528 GMT) While the focus remains on the U.S. and Europe as banking turmoil roils global financial markets, equities in emerging market have lagged peers.
While the MSCI's index for EM equities has fallen 2.5% since March 6, the U.S. benchmark S&P 500 index has slipped just 0.9%. According to Caesar Maasry, head of EM cross-asset strategy at Goldman Sachs, a downgrade of U.S. GDP in excess of 50 basis points has historically been the "tipping point" for dragging emerging market growth and asset prices into a correction. Earlier this month, analysts at Wall Street banks said the pressure on small and mid-sized U.S. banks following the swift downfall of SVB Financial Group could further slow the economy, and will likely raise the probability of a recession this year.
While Goldman Sachs cut their forecast for fourth-quarter
U.S. GDP growth by 0.3 percentage points after the banking
crisis, J.P. Morgan said GDP would be reduced by 0.5% to 1.0%
over the next year or two.
Nevertheless, Maasry added in a note that there were some
areas of EM resilience, such as Asian currencies and South Asian
stocks.
"We expect further convergence with outperformance of
Indonesia, India, and Brazil relative to Mexico, Poland, and
Taiwan assuming US cyclical pressures do not remain confined to
the Regional Banking sector."
(Bansari Mayur Kamdar)
*****
IT'S DECISION DAY, AND THE FED HAS A REAL DILEMMA ON ITS HANDS (1055 EDT/1455 GMT) For the first time in a long time the FOMC is faced with a real dilemma. To hike or to pause?
Mike O'Rourke, chief market strategist at JonesTrading, notes that a banking crisis has unfolded over the past two weeks in which three banks have failed, while another with a $200 billion balance sheet "teeters on the cusp of failure." Additionally, a systemically significant European bank was rescue-merged.
He adds that the ECB raised interest rates by 50 basis points to its highest levels in 15 years recently. The U.S. equity market dipped and recovered and is pushing to higher levels. And now, the FOMC must decide whether to increase the Fed Funds rate another 25 basis points to continue combating inflation, or to pause in the name of financial stability. O'Rourke says that the spin coming out the ECB meeting and going into the FOMC meeting is that a failure to raise will signal weakness. However, as O'Rourke sees it, the bank failures themselves signal weakness. O'Rourke admits that he has continually criticized the FOMC for being six months or more behind the curve on tightening. Now, however, he feels he is in the minority thinking that a pause would be prudent. He argues this banking crisis is the result of banks that did not prepare properly for an interest rate increase cycle, and that another increase will only serve to aggravate the problem at the banks. "Not only does the Fed need to take into consideration the long and variable lags of monetary policy, but also the prospective manner in which this crisis has changed the outlook for lending and credit growth," says O'Rourke.
He adds, "When the Fed is confident there is more than a vague promise from Secretary Yellen stabilizing the banking system, it will be easy enough to resume tightening."
(Terence Gabriel)
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BUYING THE DIP: BORROWING COSTS FALL, MORTGAGE APPLICATIONS RISE (1030 EDT/1430 GMT) Bank jitters prompted a flight to safety last week, dragging Treasury yields down and mortgage rates with it.
And so, even amid tightening credit and tougher lending
standards, demand for home loans notched its third consecutive
weekly gain last week, rising by 3% as the cost of borrowing
eased, according to the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate slid 23
basis points to 6.48%.
That sent applications for loans to purchase homes up 2.2% while refi demand jumped 4.9%.
Noting that mortgage rates touched their lowest level in a
month, MBA's Deputy Chief Economist Joel Kan writes "both
purchase and refinance applications increased for the third week
in a row as borrowers took the opportunity to act, even though
overall application volume remains at relatively low levels."
He's not wrong. Despite edging up in recent weeks, overall
mortgage demand remains 51.6% below year-ago levels:
On the heels of Tuesday's blowout existing home sales print, along with increases in housing starts/building permits and an uptick in homebuilder sentiment, recent data suggests that the sector is returning to some semblance of equanimity after the boom-and-bust COVID era. Here's a handy dashboard, which also tosses in Case-Shiller home price growth and housing stock performance for good measure. It's worth noting that the Philadelphia SE Housing index , rebased to the nadir of the COVID crash, has still handily outperformed the broader S&P 500 over the same time period:
Wall Street is showing little conviction in the opening hour of trading as market participants wait for the Fed to emerge from its conclave at 14:00 EDT, bearing tidings of what is widely expected to be a 25 basis point hike to the Fed funds target rate. The accompanying statement, revisions to economic forecasts and the all-important dot plot, not to mention Chair Powell's Q&A session to follow, are all likely to provoke their customary market gyrations.
(Stephen Culp)
*****
SITTING TIGHT (1001 EDT/1401 GMT)
Major U.S. averages are holding close to the unchanged
mark in the early stages of trading on Wednesday, after notching
their first back-to-back winning sessions since March 2-3, as
investors gird for the Fed policy announcement and subsequent
press conference from Chair Jerome Powell.
Expectations for a 25 basis point hike from the central bank stand at about 85%, with a roughly 15% chance of no hike, according to CME's
Fedwatch Tool. The market had been steadily climbing toward anticipating a 50 basis point hike before concerns about regional banks as well as the broader banking sector dampened expectations for a more aggressive Fed, with expectations rapidly changing with the ebb and flow of bank concerns.
The 11 S&P sectors are skewed mostly negative, with only three in positive territory, led by technology , while real estate is the primarily laggard with a decline of more than 1.5%.
The S&P 500 is also sitting just below its 50-day moving average just shy of 4,015, a resistance level it has not climbed above since March 9.
Below is your market snapshot:
(Chuck Mikolajczak)
*****
SWISS FRANC KEEPS SAFE-HAVEN STATUS (0932 EDT/1332 GMT) The turmoil in the Swiss banking sector, which culminated in a regulator-orchestrated Credit Suisse takeover deal by UBS this weekend, has raised some speculation the Swiss franc would lose its safe-haven status.
Analysts at Barclays said this is very unlikely.
"CHF 'safe haven' de-classification requires radical shifts in Switzerland's balance sheet via 'safe asset' outflows. This is unlikely in the near term and doubtful in the long term."
They added that an expected 50 basis point rate hike by the Swiss National Bank on Thursday and further FX interventions should allow recent resilience to extend. The Swiss franc is up around 2% this month against the dollar.
(Joice Alves)
*****
EUROPEAN PROPERTY: EQUITY RAISES COMING? (0926 EDT/1326 GMT) As markets look to have found some footing after banking stress caused wild gyrations this month, pressure on European real estate stocks shows no sign of abating with tightening financial conditions looking set to weigh further. The STOXX Europe 600 real estate index is down more 3.3% to its lowest level in five months, while battered banks are extending their bounce, helping the broader STOXX 600 equity benchmark edge slightly higher. So what is the outlook for European property? Morgan Stanley is downbeat and flags rising risks that executives at real estate companies in continental Europe may have to tap shareholders to beef up their finances. "We think risks are rising that companies will have to issue equity," write MS analysts led by Bart Gysens. "The continental universe is dominated by stocks for which yields screen too low, rents could be vulnerable, or a combination, and more often than not financed with too much debt, evidenced by myriad balance sheet repair initiatives," they say "EPS generation is under attack from an inevitable rise in debt costs, while upward pressure on asset yields drives deleveraging, which erodes EPS further," they add. Eleven of the top twelve STOXX losers are real estate stocks. Germany's Aroundtown is the biggest decliner, last down 9.2%.
(Danilo Masoni)
*****
S&P 500 INDEX: TRADERS LOOK TO BE FED SOME CLARITY (0900 EST/1300 GMT) Going into the conclusion of the a much anticipated FOMC meeting with the release of the latest policy statement at 2:00 PM EDT Wednesday, followed by Fed-Chair Powell's press conference at 2:30 PM EDT, e-mini S&P 500 futures are edging red. Meanwhile, traders are keenly focused on S&P 500 index chart levels:
The SPX ended Tuesday higher for a second-straight session, closing at 4,002.87. That said, with an intraday high of 4,009.08, the benchmark index stalled just a little more than 3 points from its rising 50-day moving average (DMA), which ended at 4,012.61.
The 50-DMA should ascend to just shy of 4,015 on Wednesday, which will roughly coincide with the March 9 high at 4,017.81. The short-term trendline from the February 2 high, which should be around 4,047, and the March 6 high, which was at 4,078.49. Additional resistance is at the line from the January 2022 record high, which is now around 4,120. The February 2 high was at 4,195.44 and the 23.6% Fibonacci retracement of the March 2020-Janaury 2022 advance is at 4,198.70.
On the downside, Tuesday's opening gap requires a fall to
3,956.62 for a fill, and the 200-DMA should be around 3,934. The
38.2% Fibonacci retracement of the March 2020-January 2022
advance is at 3,815.20. The May 2022 and March 2023 troughs were
at 3,810.32 and 3,808.86.
It now remains to be seen if the results of Wednesday's Fed
events provide enough impetus to ultimately resolve the S&P
500's multi-month trading range essentially defined by the 23.6%
and 38.2% Fibonacci retracements of the March 2020-January 2022
advance.
(Terence Gabriel)
*****
FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
