MARKET NEWS / CREDIT BUBBLE WEEKLY

March 24, 2023: The Big Pivot

MARKET NEWS / CREDIT BUBBLE WEEKLY
March 24, 2023: The Big Pivot
Doug Noland Posted on March 25, 2023

Germany’s Deutsche Bank CDS spiked 30 higher intraday Friday, to 210 bps – surpassing panicky market levels from last October and even March 2020. Deutsche Bank CDS had dropped 21 bps Monday, relieved Swiss officials had orchestrated a Sunday evening takeover (bailout) of troubled Credit Suisse by UBS. With Credit Suisse’s troubles supposedly an anomaly, markets were hopeful a European banking crisis had been quickly nipped in the bud.

Not so fast. Deutsche Bank CDS surged 50 bps Thursday and Friday to multi-year highs, as the stock was slammed almost 9%. And a 6% late-week selloff more than reversed the post-Credit Suisse bailout European bank stock rally (STOXX 600).

March 19 – Bloomberg (Neil Callanan, Tasos Vossos and Priscila Azevedo Rocha): “Among the biggest losers in the shotgun sale of Credit Suisse Group AG are investors in the firm’s riskiest bonds, known as AT1s, worth $17 billion. These money managers are set to be wiped out — potentially sending that $275 billion market for bank funding into a tailspin… Creditors are frantically poring through the fine print for these so-called additional tier 1 securities to understand if authorities in other countries could repeat what the Swiss government did on Sunday: Wiping them out while preserving $3.3 billion of value for equity investors. That’s not supposed to be the pecking order, some holders in the bonds insist.”

Deutsche Bank’s “AT1” bonds yielded 8.7% to begin the month. Yields spiked to 10.81% in frantic Monday trading, before settling down to 10.17% by Wednesday’s close. Yields spiked 154 bps Friday to a record 12.02%.

March 24 – Wall Street Journal (Juliet Chung and Sam Goldfarb): “Hedge funds that bet on big-picture market moves have been hit with steep losses as a spate of recent bank failures upends bets that interest rates would remain elevated. The souring of the wager led some, including Maniyar Capital Advisors and Haidar Capital Management, to lose more than 20% this month. Many of the funds, which had notched big gains as rates marched steadily upward in 2022, are now flat to down for the year following a steep recent drop in Treasury yields. So-called trend-followers, which try to take advantage of momentum in markets, also were hurt.”

The surging cost of raising new bank capital will leave a mark. We can assume more risk aversion throughout the global bank community, along with much greater regulatory zeal. And despite the Credit Suisse bailout and Fed/Treasury’s extraordinary measures to stabilize the U.S. banking system, global de-risking/deleveraging gained important momentum this week.

Friday from Bloomberg: “Deutsche Bank Drops in Selloff Citi Describes as Irrational.”

Not the best choice of adjectives. Granted, Deutsche Bank has de-risked since the GFC. At about $1.3 TN, Total Assets are down from peak levels and about flat since 2014. Deutsche’s investment portfolio shrank over the past two years (to $115bn), though Total Loans expanded about $50 billion during the pandemic to $506 billion. At $72 billion, Total Equity has increased $10 billion in two years. Its derivatives portfolio is smaller than during the GFC days. Deutsche Bank CDS traded at a one-year low 85 bps earlier this month.

Deutsche’s problem is that it’s a highly levered and fragile institution in a market that now fears systemic fragilities. It has $620 billion of deposits and another $105 billion of “Short-Term Borrowings and Repos.” The bank is a significant player in global derivatives markets. And if one is increasingly uneasy with how this market, financial and economic crisis might unfold, it’s perfectly rational to reduce exposures to Deutsche Bank. Contagion. The bottom line: Despite the Credit Suisse bailout, Deutsche CDS prices more than doubled in two weeks.

And from the FT (Bryce Elder): “As for derivatives, gigantic numbers mean very little: A few investors have got excited about Deutsche’s €42.5trn notional OTC derivatives book, missing the obvious point that all but €13.1trn is centrally cleared (with no counterparty credit risk).”

Gigantic derivative numbers do mean very little – in normal times. But when systemic worries erupt, the scope and opacity of derivative daisy-chain exposures create uncertainty and instill caution.

It’s worth noting this week’s pop in CDS for the big Japanese global banks (trailing only Deutsche Bank on the weekly leaderboard). Nomura CDS surged 25 (to 119bps), Sumitomo Mitsui Bank 17 (89bps) and Mizuho Bank 15 (93bps).

Also near the top of the leaderboard were the big U.S. financial behemoths. Bank America CDS rose another five to 125 bps; Citigroup three to 124 bps; Wells Fargo three to 110 bps; Goldman Sachs three to 123 bps; JPMorgan three to 102 bps; and Morgan Stanley one to 122 bps.

Yet the week’s closing prices don’t do justice. After ending last week at 114, Goldman Sachs CDS traded up to 123 in (post Credit Suisse bailout) Monday trading. Goldman CDS was down to 102 in late-Wednesday trading, only to surge to 123 early in Friday’s session. JPMorgan jumped to 99 Monday, to then drop as low as 84 intraday Thursday, only to spike to 102 bps early Friday – the first time above 100 bps since unstable October.

Last Thursday, March 16th (Reuters): “The U.S. banking system remains sound and Americans can feel confident that their deposits are safe,” Treasury Secretary Janet Yellen said…, but she denied that emergency actions after two large bank failures mean that a blanket government guarantee now existed for all deposits.”

Monday (Bloomberg): “US officials are studying ways they might temporarily expand Federal Deposit Insurance Corp. coverage to all deposits…”

Tuesday (Reuters): “U.S. Treasury Secretary Janet Yellen told bankers on Tuesday that she is prepared to intervene to protect depositors in smaller U.S. banks suffering deposit runs… ‘The steps we took were not focused on aiding specific banks or classes of banks… And similar actions could be warranted if smaller institutions suffer deposit runs’…”

Wednesday (Financial Times): “US Treasury Secretary Janet Yellen ruled out a broad expansion of deposit insurance to protect savers with balances above $250,000 in the near term… ‘I have not considered or discussed anything to do with blanket insurance or guarantees of deposits.’”

Thursday (Reuters): “Wall Street closed higher on Thursday as market participants were reassured by U.S. Treasury Secretary Janet Yellen’s reassurances that measures will be taken to keep Americans’ deposits safe.”

It was fascinating to watch Secretary Yellen’s ‘not considered or discussed anything…’ blanket deposit guarantee comments hit bank and market prices in the middle of Powell’s post-FOMC press conference.”

March 22 – Associated Press (Christopher Rugaber): “The Federal Reserve extended its year-long fight against high inflation… by raising its key interest rate by a quarter-point despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system. At a news conference, Fed Chair Jerome Powell sought to reassure Americans that it is safe to leave money in their banks… ‘We have the tools to protect depositors when there’s a threat of serious harm to the economy or to the financial system,’ Powell said. ‘Depositors should assume that their deposits are safe.’”

Federal Reserve Credit surged $211 billion the past week, with a two-week jump of $353 billion. Total Fed Assets inflated $392 billion in two weeks (to $8.734 TN), the largest increase since Covid crisis April 2020.

March 22 – Reuters (Michael S. Derby): “Federal Reserve Chair Jerome Powell said… the sharp reversal of the central bank’s effort to shrink the size of its balance sheet in the wake of the collapse of Silicon Valley Bank does not mean it is using its holdings to provide renewed stimulus to the economy. ‘The balance sheet expansion is really temporary lending to banks’ and ‘it’s not intended to directly alter the stance of monetary policy,’ Powell said…”

“Really temporary” lending to banks hearkens back to “transitory” inflation.

March 20 – Bloomberg (Austin Weinstein and Max Reyes): “The Federal Home Loan Bank System issued $304 billion in debt last week… That’s almost double the $165 billion that liquidity-hungry lenders tapped from the Federal Reserve. The FHLBs are a Depression-era backstop originally created to boost mortgage lending. The system is known as the ‘lender of next-to-last resort’ — a play on the nickname for the Federal Reserve’s discount window. Last week’s boost in debt reflects an intense demand for cash across the US banking sector after three lenders collapsed in rapid succession amid a liquidity crunch that spurred customers to yank deposits en masse.”

$304 billion in one week! This after expanding $524 billion (72%) last year. Where’s their regulator?

March 20 – Bloomberg (Austin Weinstein and Max Reyes): “The FHLB System ‘is not intended or structured to function as a lender of last resort,’ said Joshua Stallings, deputy director for bank regulation at the Federal Housing Finance Agency, the FHLB System’s regulator, in a March 13 statement. The agency is conducting a wide-ranging review of the home loan banks. The banks were first created to free up cash for small banks to make mortgages, but have since evolved to be a short-term lender also used by Wall Street giants, including Citigroup Inc. and Wells Fargo & Co.”

March 22 – Yahoo Finance (David Hollerith): “Federal Reserve Chair Jerome Powell made his first comments about the current banking crisis, saying that the management of Silicon Valley Bank ‘failed badly’ but that the institution’s weaknesses don’t threaten the U.S. banking system. ‘This was a bank that was an outlier,’ he said… following a Fed decision to hike interest rates 0.25%, citing the institution’s high percentage of uninsured deposits and its large investment in bonds with longer durations. ‘These are not weaknesses that are there at all broadly through the banking system.’”

I’ll spare readers an irate rant. First, let me restate my long-held belief that central banks are a critical institution. But the failings of the Fed – and contemporary central banking doctrine more generally – are reprehensible. Our central bank embarked on a historic experiment in activist market intervention, zero rates and QE. Their balance sheet expanded 10-fold in 14 years. And we were repeatedly assured that – during aggressive monetary stimulus – so-called “macro prudential” measures would be the centerpiece of policies to ensure financial stability was not compromised by (loose “money”-induced) aggressive lending, leveraging and speculation. This abject failure has begun to be exposed.

The numbers (from the Fed’s Z.1). Total Bank Deposits surged $5.165 TN, or 33.2%, during the three years 2020 through the end of 2022. For perspective, this was roughly equal to deposit growth for the nine-year period 2010 through 2018.

The Fed’s $5 TN QE program flooded the banking system with deposits. Importantly – and most germane to today’s backdrop – radical monetary stimulus inundated the banking system with liquidity at the late stage of protracted Credit and speculative booms. This fatefully extended “Terminal Phase” Bubble excess (with predictable consequences).

Banks used these deposits to lend even more aggressively, including to the plethora of negative cash-flow enterprises that proliferated during a historic period of manic behavior and Bubble excesses. They lent freely to real estate markets grossly inflated by zero rates, ultra-loose lending conditions, and massive inflows of speculative finance (buying homes, multi-family housing, office buildings, commercial properties generally).

Moreover, banks took deposit money and aggressively purchased securities – in markets grossly inflated by zero rates and QE. For the banking system, the Fed’s colossal pandemic monetary stimulus – zero rates and QE – was essentially a noose wrapped in glamorously silky dove feathers.

In three years, banking system Treasury holdings surged $702 billion, or 80%, to $1.581 TN, having doubled from June 2019 (just prior to the resumption of QE). Agency/MBS holdings jumped $580 billion, or 22%, to $3.215 TN, while Corporate Bond holdings rose $318 billion, or 49%, to $973 billion.

SVB, no doubt about it, was up to its eyeballs in idiosyncratic risk. Yet the unfolding banking crisis is systemic. Years of loose “money” was systemic. Gorging on risky loans and mispriced securities – systemic. There was a protracted period of extraordinary system-wide excess. Crazy everywhere.

Lending will now tighten, Credit growth will slow, and the downside of the Credit Cycle will surely unleash economic stagnation and major loan quality issues. Understandably, focus is now on the small and medium sized banks with their big exposures to vulnerable real estate loans. Compounding U.S. risks is the harsh reality that finance and economies are fragile globally. Is the post “zero Covid” honeymoon quickly winding down in China?

March 23 – Bloomberg: “Sunac China Holdings Ltd. warned investors that it expects a second consecutive year of multi billion-yuan losses, underscoring the plight of the nation’s builders amid a record home-market slowdown. The Beijing-based real estate developer predicted a preliminary net loss of as much as 28 billion yuan ($4.1bn) in 2022… That followed a record loss of 38 billion yuan in the year prior…”

March 22 – Bloomberg (Lorretta Chen): “State-backed developer Sino-Ocean’s dollar notes tumbled as it deferred interest due Tuesday on a perpetual bond, the latest example of the property sector’s cash crunch. The decision doesn’t constitute a default, according to a company spokeswoman, and was prompted by efforts to ‘preserve cash’ and ‘the fact that the financing condition of the real estate industry hasn’t significantly improved.’ The firm’s dollar bonds lost more than 10% Tuesday.”

The current bullish narrative sees China as the relative safe haven, as the U.S. and Europe struggle to contain banking crises. Apparently, Beijing has everything under control – and will surely do whatever it takes to keep it that way. And with such confidence comes vulnerability. Global conditions are tightening, with negative ramifications for unsound banks, companies and markets everywhere. And is there any country where unsound pervades the entire system as it does in China?

Country Garden’s (#1 developer) bond yields surged 370 bps this week to 30.17%, the high since December 1st. Kaisa yields spiked almost 10 percentage points to 140% – the high since November. Longfor yields were also up almost 10 percentage points to 105% (high since Dec.). Evergrande yields rose another 543 bps this week to 182%. An index of Chinese high-yield dollar bonds saw yields surge 125 bps this week to 18.19% – the first time above 18% since January 3rd. An index of Asian high-yield bonds rose 61 bps to 14.36% (high since January 3rd).

March 24 – Bloomberg (Sofia Horta e Costa): “In the past 18 months, no group has issued more of the controversial additional Tier 1 bonds than Chinese banks. State-owned lenders sold about $42 billion worth of AT1 notes, the riskiest type of bank debt, to onshore investors, Bloomberg Intelligence analysts Pri de Silva and Adrian Sim said in a recent note.”

Big four Chinese bank CDS surged to multi-month highs Monday. China Construction Bank CDS traded 12 higher Monday to 110 bps (closed week at 106), the high since November 11th. Industrial & Commercial Bank rose 12 Monday to 109 bps (closed week at 101) – also the high since mid-November. Bank of China CDS jumped 12 this week to 106 bps, the high since November 23rd. China Development Bank CDS rose 10 this week to 99 bps (high since Nov. 14).

March 22 – Caixin Global: “China Huarong Asset Management Co. Ltd. expects to post a net loss of 27.6 billion yuan ($4 billion) for 2022…, citing factors including volatility in the capital markets leading to declines in the value of some assets, business transition and the real estate industry slump… Created following the Asian financial crisis in the late 1990s to safeguard China’s state-owned banks, Huarong expanded beyond its original mandate and grew into a financial conglomerate engaged in a wide range of financial services, including securities, trusts, banking and financial leasing.”

Huarong’s yields surged 220 bps this week to 11.83%, the high since November 10th. Notably, China sovereign CDS traded as high as 88 bps in Friday trading, the highest level since mid-November. China CDS was at 64 during the first week of the month and below 50 in February.

When analyzing the world of finance, there’s much we don’t know. We do, however, have ample facts and data to underpin sound analysis. Now more than ever, the analysis seems to come down to analytical frameworks. Many view the system as resilient. Extreme measures we’ve witnessed over the past two weeks solidify confidence that policymakers learned from 2008 and will do whatever is necessary to thwart crisis dynamics.

I have strong biases, having so closely monitored developments for more than three decades. Facts and data support the “history’s greatest Bubble” thesis. Credit and speculative excesses have been unprecedented. This doesn’t matter to most. In my analytical framework, it comes with momentous ramifications. The amount of resource misallocation and malinvestment during this protracted boom cycle is without precedent. This doesn’t matter to most. From my analytical perspective, sound Credit and investment are the bedrock for sustainable growth and stability (financial, economic and social).

Things that I know are critical don’t matter to most. They don’t matter, because the Fed can always print Trillions and Washington can run Trillions of deficits – and we can simply reflate out of any predicament. The Fed’s balance sheet is ballooning again, in two weeks reversing much of nine months of quantitative tightening.

The markets’ fixation on Yellen’s deposit guarantee comments suggests a deep concern for bank run contagion. And while moral hazard is an issue, I am today more concerned about the fiscal consequences of blanket deposit guarantees. I’ve argued that the “global government finance Bubble” is the end of the line. There’s no new source of Credit growth that will let central banks and governments off the hook. And it doesn’t take a wild imagination right now to envisage simultaneous uncontrolled expansions of Fed liabilities and Treasury debt.

While markets are these days fixated on an imminent Fed dovish pivot, out further on the horizon looms a crisis of confidence in government finance. With Credit set to tighten, I understand expectations for disinflation. But I can’t shake the feeling that there’s more structural inflation in the system than meets the conventional eye.

Especially if runaway monetization sparks a dollar problem, pricing pressures could surprise to the upside. I also believe we could be witnessing a major shift in the workings of the Fed’s balance sheet. The Federal Reserve’s focus on banking system liquidity is likely in its infancy. Treasuries purchases as the predominant mechanism for system stabilization and stimulus are so previous cycle. Maybe that’s The Big Pivot with the greatest ramifications to contemplate.

March 21 – Wall Street Journal (Editorial Board): “Financial regulators have ignored their post-2008 rule book to contain the latest banking panic. And on Tuesday Treasury Secretary Janet Yellen tore it up by announcing a de facto guarantee of all $17.6 trillion in U.S. bank deposits. Regional bank stocks rallied, but it’s important to understand what this moment means: the end of market discipline in U.S. banking. ‘Our intervention was necessary to protect the broader U.S. banking system,’ Ms. Yellen told the American Bankers Association convention. ‘And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.’ Translation: Depositors needn’t worry about the safety and soundness of banks. Uncle Sam will make sure you don’t lose money. This isn’t an explicit guarantee, but it’s close enough for government work.”

For the Week:

The S&P500 gained 1.4% (up 3.4% y-t-d), and the Dow rallied 1.2% (down 2.7%). The Utilities declined 1.0% (down 7.2%). The Banks slipped 0.5% (down 22.3%), and the Broker/Dealers declined 0.6% (down 1.9%). The Transports dipped 0.5% (up 2.3%). The S&P 400 Midcaps rallied 1.3% (down 1.1%), and the small cap Russell 2000 increased 0.5% (down 1.5%). The Nasdaq100 advanced 2.0% (up 16.7%). The Semiconductors rose 1.2% (up 23.3%). The Biotechs gained 0.5% (down 2.8%). While bullion slipped $11, the HUI gold equities index rose 2.5% (up 8.0%).

Three-month Treasury bill rates ended the week at 4.50%. Two-year government yields declined seven bps this week to 3.77% (down 66bps y-t-d). Five-year T-note yields fell nine bps to 3.41% (down 60bps). Ten-year Treasury yields declined five bps to 3.38% (down 50bps). Long bond yields increased two bps to 3.65% (down 32bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 4.92% (down 47bps).

Greek 10-year yields fell seven bps to 4.06% (down 50bps y-o-y). Italian yields declined four bps to 4.01% (down 69bps). Spain’s 10-year yields fell four bps to 3.19% (down 33bps). German bund yields rose two bps to 2.13% (down 32bps). French yields declined two bps to 2.66% (down 32bps). The French to German 10-year bond spread narrowed four to 53 bps. U.K. 10-year gilt yields were unchanged at 3.28% (down 39bps). U.K.’s FTSE equities index gained 1.0% (down 0.6% y-t-d).

Japan’s Nikkei Equities Index added 0.2% (up 4.9% y-t-d). Japanese 10-year “JGB” yields rose three bps to 0.32% (down 11bps y-t-d). France’s CAC40 rallied 1.3% (up 8.4%). The German DAX equities index gained 1.3% (up 7.4%). Spain’s IBEX 35 equities index recovered 0.8% (up 6.8%). Italy’s FTSE MIB index rallied 1.6% (up 9.2%). EM equities were mixed. Brazil’s Bovespa index dropped 3.1% (down 9.9%), while Mexico’s Bolsa index rallied 1.6% (up 8.9%). South Korea’s Kospi index increased 0.8% (up 8.0%). India’s Sensex equities index declined 0.8% (down 5.4%). China’s Shanghai Exchange Index added 0.5% (up 5.7%). Turkey’s Borsa Istanbul National 100 index fell 2.0% (down 8.7%). Russia’s MICEX equities index jumped 3.0% (up 11.0%).

Investment-grade bond funds posted outflows of $865 million, and junk bond funds reported negative flows of $902 million (from Lipper).

Federal Reserve Credit surged $211bn last week to $8.658 TN – with a two-week gain of $353bn. Fed Credit was down $243bn from the June 22nd peak. Over the past 184 weeks, Fed Credit expanded $4.931 TN, or 132%. Fed Credit inflated $5.847 Trillion, or 208%, over the past 541 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $52.7bn last week to $3.309 TN. “Custody holdings” were down $141bn, or 4.1%, y-o-y.

Total money market fund assets jumped $117.4bn to a record $5.132 TN, with a two-week gain of $238 billion. Total money funds were up $571bn, or 12.5%, y-o-y.

Total Commercial Paper sank $45.4bn to an 10-month low $1.118 TN. CP was up $68bn, or 6.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell 12 bps to 6.39% (up 197bps y-o-y). Fifteen-year rates dropped 23 bps to 5.62% (up 199bps). Five-year hybrid ARM rates sank 60 bps to 5.55% (up 219bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down eight bps to 6.88% (up 236bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.6% to 103.12 (down 0.4% y-t-d). For the week on the upside, the Mexican peso increased 2.5%, the Norwegian krone 2.0%, the South African rand 1.8%, the Japanese yen 0.9%, the euro 0.8%, the Singapore dollar 0.8%, the Swiss franc 0.7%, the South Korean won 0.7%, the Brazilian real 0.6%, the Swedish krona 0.6%, and the British pound 0.5%. On the downside, the New Zealand dollar declined 1.1%, the Australian dollar 0.8% and the Canadian dollar 0.1%. The Chinese (onshore) renminbi increased 0.28% versus the dollar (up 0.46%).

Commodities Watch:

March 24 – Financial Times: “Traders quip that one of the few things to rally during bear periods is volatility. Add gold to the list. Its price has leapt about 7% so far in March to one-year highs of just under $2,000 per ounce. With investors dumping stocks and corporate bonds, money has flowed into both government bonds and gold. Interest in the yellow metal seems odd, given that price inflation in the US and elsewhere may well have peaked. And gold offers no income to investors… So what explains the renewal of interest? Well, gold does offer a safe haven, particularly for retail investors worried that their money may not be safe in a bank.”

The Bloomberg Commodities Index increased 0.4% (down 9.1% y-t-d). Spot Gold dipped 0.6% to $1,978 (up 8.7%). Silver jumped 2.8% to $23.23 (down 3.0%). WTI crude recovered $2.52 to $69.26 (down 14%). Gasoline rallied 3.5% (up 5%), while Natural Gas sank 5.2% to $2.22 (down 51%). Copper jumped 2.8% (down 3%). Wheat fell 3.1% (down 13%), while Corn rallied 1.4% (down 5%). Bitcoin increased $70, or 0.2%, this week to $27,420 (up 65%).

Bank Crisis Watch:

March 19 – Reuters (John Revill): “Credit Suisse and UBS could benefit from more than 260 billion Swiss francs ($280bn) in state and central bank support, a third of the country’s gross domestic product, as part of their merger to buffer Switzerland against global financial turmoil, documents outlining the deal show. Swiss authorities announced on Sunday that UBS had agreed to buy rival Swiss bank Credit Suisse in a shotgun merger aimed at avoiding more market-shaking turmoil in global banking.”

March 21 – Reuters (John O’Donnell and Andres Gonzalez): “Days before a hastily convened press conference late on Sunday that would make the world’s front pages, Switzerland’s political elite were secretly preparing a move that would jolt the globe. While the nation’s central bank and financial regulator publicly declared that Credit Suisse was sound, behind closed doors the race was on to rescue the nation’s second-biggest bank. The chain of events, led to the erasure of one of Switzerland’s flagships, a merger backed by 260 billion Swiss francs ($280bn) of state funds and a move that would upend global finance: favoring the bank’s shareholders to the detriment of bond investors.”

March 19 – New York Times (Jeanna Smialek): “The Federal Reserve and other major global central banks on Sunday announced that they would work to make sure dollars remain readily available across the global financial system as bank blowups in America and banking issues in Europe create a strain. The Fed, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank announced that they would more frequently offer so-called swap operations — which help foreign banks to get weeklong access to U.S. dollar financing — through April. Instead of being weekly, the offerings will for now be daily. The point of the move is to try to prevent tumultuous conditions in markets as jittery investors react to the blowups of Silicon Valley Bank and Signature Bank in the United States and the arranged takeover of Credit Suisse by UBS in Europe.”

March 20 – Financial Times (Stephen Gandel, Joshua Franklin, Brooke Masters and Ortenca Aliaj): “Wall Street bank chief executives are trying to come up with a new plan for First Republic after a $30bn lifeline failed to arrest a sharp sell-off in the lender’s shares. The executives will discuss if anything more can be done for the California-based lender on the sidelines of a pre-planned gathering in Washington on Tuesday… First Republic shares, which have fallen almost 90% this month, closed down 47% on Monday despite an attempt by 11 banks to stabilise the lender by depositing $30bn last week. That has prompted JPMorgan Chase chief Jamie Dimon, who spearheaded the deposit plan, to explore other options to support First Republic… One of the possibilities under consideration is converting all or a portion of their deposits into a capital infusion…”

March 20 – Wall Street Journal (Ben Eisen, AnnaMaria Andriotis and David Benoit): “JPMorgan… Chief Executive Jamie Dimon is leading discussions with the chief executives of other big banks about fresh efforts to stabilize troubled First Republic Bank. The discussions… have focused on how the industry could arrange for an investment that would boost the bank’s capital, according to people familiar… Among the options on the table… is an investment in First Republic by the banks themselves. Eleven big banks banded together last week to deposit $30 billion in First Republic in an effort to restore confidence in the lender. The… bank’s customers have withdrawn some $70 billion since the collapse of Silicon Valley Bank earlier this month…”

March 22 – Reuters (Niket Nishant): “Wall Street CEOs and U.S. officials discussing an intervention at First Republic Bank are exploring the possibility of government backing to encourage a deal, Bloomberg News reported…, citing people with knowledge of the situation. Among options, the government could play a role in lifting assets out of First Republic that have eroded its balance sheet, according to the report. Additional ideas have included offering liability protection, applying capital rules more flexibly or easing limits on ownership stakes…”

March 24 – Wall Street Journal (Jack Pitcher): “The capital markets have been on ice since the collapse of Silicon Valley Bank two weeks ago. No companies with investment-grade credit ratings sold new bonds over the seven business days from March 9 through March 17, the first week in March without a new high-grade bond sale since 2013, according to PitchBook LCD. The market for new junk-bond sales has largely stalled this month, and no companies have gone public on the New York Stock Exchange in more than two weeks… Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion. The riskier corporations that borrow by issuing higher-yielding junk bonds and leveraged loans are finding it even harder to sell new debt. Companies have raised some $5 billion of junk bonds this month versus the five-year average of $24 billion.”

March 21 – Wall Street Journal (Konrad Putzier and Peter Grant): “A record amount of commercial mortgages expiring in 2023 is set to test the financial health of small and regional banks already under pressure… Smaller banks hold around $2.3 trillion in commercial real estate debt, including rental-apartment mortgages, according to… data firm Trepp Inc. That is almost 80% of commercial mortgages held by all banks… Many skyscrapers, business parks and other office properties have lost value during the pandemic era as their business tenants have adopted new remote and hybrid workplace strategies… In a recent paper, a group of economists… estimated that the value of loans and securities held by banks is around $2.2 trillion lower than the book value on their balance sheets. That drop in value puts 186 banks at risk of failure if half their uninsured depositors decide to pull their money… Real-estate loans account for more than a quarter of the shortfall, said [Trepp’s] Mr. Piskorski. At the median U.S. bank, commercial real-estate loans account for 38% of loan holdings…”

March 22 – Bloomberg (John Gittelsohn): “Commercial-property owners face nearly $400 billion of debt maturing this year as regional bank failures threaten the industry’s biggest source of financing. In addition, almost $500 billion of loans will come due in 2024, according to… MSCI Real Assets. Landlords received about 27% of financing from local and regional banks in 2022, the biggest source of newly originated debt… Property owners who need to refinance this year are confronting much higher borrowing costs and falling property values. This month’s collapse of Silicon Valley Bank and Signature Bank threatens to make negotiations even tougher as local lenders scramble to reduce risk. ‘The turmoil we’ve seen in the last week has hit dead center in the lender group that supported more commercial mortgages in 2022 than any other,’ said Jim Costello, an economist at MSCI Real Assets. ‘It was already happening. This is kicking a man when he’s down.’”

March 20 – Bloomberg (Charles Williams): “There has ‘simply been nowhere to hide in CMBS’ amid a broad selloff in risk assets, JPMorgan analysts Chong Sin, John Sim and Terrell Bobb wrote in a March 17 research report. ‘What started as a spread widening episode in IG mezz in the week leading up to SVB’s collapse has infected AAA CMBS this past week regardless of format,’ the analysts wrote, adding that shorter durations AAAs haven’t been spared either. The collapse of Silicon Valley Bank has placed a ‘magnifying Glass’ on regional banks, they said, noting that their commercial real estate (CRE) loan books remain a ‘major concern.’”

March 20 – Bloomberg (Cristiane Lucchesi and Daniel Cancel): “The extent of the economic fallout from the banking crisis isn’t yet clear, but the turmoil will prompt regulators to take another look at rules governing the industry, according to Goldman Sachs Group Inc.’s Beth Hammack. ‘It will force a rethinking in certain areas like around some of the bank regulations,’ said Hammack, Goldman’s co-head of the global financing group… ‘I think what you’re seeing now is close scrutiny of the banking sector to understand how everyone is handling those risk-management challenges.’”

March 22 – Reuters (Nupur Anand): “JPMorgan… analysts estimate that the ‘most vulnerable’ U.S. banks are likely to have lost a total of about $1 trillion in deposits since last year, with half of the outflows occurring in March following the collapse of Silicon Valley Bank. The team of JPMorgan analysts… did not name any of the banks they categorized as ‘most vulnerable’ or say how many they included in this group. ‘The uncertainty generated by deposit movements could cause banks to become more cautious on lending,’ they wrote.”

March 22 – Bloomberg (Tom Maloney, Paulina Cachero and Priya Anand): “Silicon Valley Bank was known as the bank of startups. But it was just as much the bank of venture capital funds SVB had long been an innovator in lending to wealthy tech investors during its four-decade run. It offered two products — capital call lines of credit and partner lending — that, when combined with record-low interest rates and relentless demand for high-growth investments, helped create a money machine that fueled the Silicon Valley economy and beyond. That venture boom is now teetering with global central banks rushing to tighten policy in the face of the highest inflation in decades, causing many funds to sharply mark down their startup investments. While the loan offerings to venture capital firms weren’t the main reason SVB collapsed…, the prospect of this money spigot shutting off threatens to worsen the tech slowdown as both funds and startups lose their most important lender.”

March 23 – Bloomberg (Nicholas Comfort and Steven Arons): “The rapidly unfolding crises of confidence at Credit Suisse Group AG and Silicon Valley Bank are prompting some regulators gathered at the European Central Bank to rethink their treatment of liquidity risk. The watchdogs are in the early stages of considering how to improve banks’ liquidity management, according to people familiar…”March 23 – Bloomberg: “A Chinese commercial lender won’t exercise an early redemption option in April on a Tier 2 capital bond, the latest to make that decision amid turmoil this month at banks in Europe and the US. Hubei Jingmen Rural Commercial Bank Co. said… it will let pass the call option on a 200 million yuan ($29 million) note. Two peers, Yantai Rural Commercial Bank Co. and Anhui Taihe Rural Commercial Bank Co., opted earlier in March to not call respective 300 million yuan and 100 million yuan Tier 2 bonds.”

March 22 – Bloomberg (Jenny Surane): “Citigroup Inc. Chief Executive Officer Jane Fraser said mobile apps and consumers’ ability to move millions of dollars with a few clicks of a button mark a sea change for how bankers manage and regulators respond to the risk of bank runs… ‘It’s a complete game changer from what we’ve seen before,’ Fraser said… ‘There were a couple of Tweets and then this thing went down much faster than has happened in history. And frankly I think the regulators did a good job in responding very quickly because normally you have longer to respond to this.’”

Market Instability Watch:

March 20 – Bloomberg (Justina Lee): “A week of banking turmoil is sparking a rout across the systematic-investing world akin to the Covid-era disruption, hammering quants who were just finding their feet after a challenging start to the year. Trouble at Credit Suisse Group AG — on the heels of regional banking disorder in the US — is hitting popular rules-based trades as investors bet the crisis foreshadows an end to Federal Reserve policy tightening. While the direct link between rates and quant strategies is much debated, in the past few sessions bonds have surged, cheap stocks struggled and megacaps have been resurgent — market conditions that go directly against how many programmatic trades are currently set up… ‘There are some pretty nasty numbers from the last couple of days,’ said Michael Harris, president of Quest Partners LLC, a $2.7 billion CTA that rides short-term trends. ‘One of the big positions that has only begun to get unwound in our space is the large concentration of shorts in global fixed income.’”

March 23 – Wall Street Journal (Juliet Chung and Sam Goldfarb): “Hedge funds that bet on big-picture market moves have been hit with steep losses as a spate of recent bank failures upends bets that interest rates would remain elevated. The souring of the wager led some, including Maniyar Capital Advisors and Haidar Capital Management, to lose more than 20% this month. Many of the funds, which had notched big gains as rates marched steadily upward in 2022, are now flat to down for the year following a steep recent drop in Treasury yields. So-called trend-followers, which try to take advantage of momentum in markets, also were hurt.”

March 24 – Bloomberg (Libby Cherry and Greg Ritchie): “A Federal Reserve facility that gives foreign central banks access to dollar funding was tapped for a record $60 billion, in a week of banking stress that has roiled markets. The demand came through the Fed’s Foreign and International Monetary Authorities Repo Facility and encompasses the week through March 22… The facility was established in the midst of the pandemic and is designed to help ease any pressures in global dollar funding markets. It allows foreign central banks to post their US Treasury holdings as collateral in exchange for dollar liquidity…”

March 20 – Bloomberg (Carmen Reinicke): “Bank failures, market turmoil and ongoing economic uncertainty as central banks battle high inflation have increased the chances of a ‘Minsky moment,’ according to JPMorgan Chase & Co.’s Marko Kolanovic… ‘Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,’ a team of JPMorgan strategists… wrote…”

March 21 – Wall Street Journal (Matt Wirz): “Strains in the banking sector are roiling a roughly $8 trillion bond market considered almost as safe as U.S. government bonds. So-called agency mortgage bonds are widely held by banks, insurers and bond funds because they are backed by the mortgage loans from government-controlled lenders Fannie Mae and Freddie Mac… Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said.”

March 22 – Financial Times (Jennifer Hughes, Harriet Clarfelt and Joshua Chaffin): “Commercial property loans are joining deposit flight and bond portfolios as the biggest perceived risk for US banks as rattled investors fret about lenders’ strength following the collapses of Silicon Valley Bank and Signature Bank. Strains in the $5.6tn market for commercial real estate loans have deepened in recent months… Analysts fear any further reduction in lending — say, from businesses more keen on hoarding deposits following two shock bank runs in a week — could make a perilous situation worse. The threat of a credit crunch rippling across the global financial system has overtaken inflation this month as investors’ biggest worry, according to a monthly global survey of fund managers by Bank of America. Thousands of small and medium-sized banks that make up the bulk of US lenders account for about 70% of so-called CRE loans, according to JPMorgan analysts.”

Bursting Bubble and Mania Watch:

March 18 – Wall Street Journal (Gregory Zuckerman, Ben Eisen and Hannah Miao): “Silicon Valley Bank was a center of gravity in the tech industry. Its bankers understood technology and were eager to support unproven companies. They gave advice to executives and made personal loans to them, helping them splurge on homes and vineyards. The bankers hosted poker games, cooking classes, boat parties and mixers that brought together entrepreneurs and investors. ‘They were a mixture of a real bank that could handle transactions and lend money, but they also were fun people to hang out with at parties,’ said Jonathan Medved, an Israeli venture-capital investor who worked with SVB for over 30 years.”

March 23 – Bloomberg (Sagarika Jaisinghani): “American households will sell $750 billion of stocks this year in the first annual drop in demand since 2018, thanks to higher bond yields and lower savings, Goldman Sachs… strategists say. Marking an end to years of belief in TINA — that there’s no alternative to equities — households will instead boost allocation to credit and money-market assets… US households have been key buyers of stocks through the era of ultra-loose monetary policy seen since the global financial crisis. That trend saw a ‘significant slowdown’ last year as the Federal Reserve began tightening, although households still directly owned 38% of the total US equity market…”

March 18 – Financial Times (Andrew Edgecliffe-Johnson, Stephen Foley and George Hammond): “A week after Silicon Valley Bank collapsed, a group of venture capital firms wrote to the shell-shocked start-ups they had put their money into. It was time, they said, to talk about the ‘admittedly not so sexy’ function of treasury management. Days of scrambling to account for their companies’ funds presented a generation of founders with an uncomfortable fact: for all the effort they had put into raising cash, few had spent much time thinking about how to manage it.”

March 20 – Associated Press (Alexander Weber): “Amazon plans to eliminate 9,000 more jobs in the next few weeks… The job cuts would mark the second largest round of layoffs in the company’s history, adding to the 18,000 employees the tech giant said it would lay off in January. The company’s workforce doubled during the pandemic, however, in the midst of a hiring surge across almost the entire tech sector. Tech companies have announced tens of thousands of job cuts this year.”

March 20 – Wall Street Journal (Jeanna Smialek): “Some U.S. public pension and investment funds are pulling back on private equity after a decade of state and local retirement systems aggressively pursuing the expensive, risky and hard-to-trade asset class. Maryland’s $65 billion retirement system is investing less new money in private equity. At Alaska’s $77 billion state fund, the investment chief wants to cancel a planned ramp-up. And the $615 million pension fund of Mendocino County, Calif., last month opted against introducing private equity to its investment mix. ‘We think you can get to the same destination with just public market assets and your real estate and infrastructure portfolios,’ Greg DeForrest, a senior vice president with investment consultant Callan, told the fund’s board. ‘Without private equity, you don’t have to deal with the costs, the fees, the administrative headache and the reporting headache associated with it.’”

March 20 – Reuters (Davide Barbuscia): “Bond giant PIMCO lost about $340 million on a category of Credit Suisse bonds that were wiped out by the takeover by UBS, with the American investment manager’s overall exposure to the Swiss lender running into billions, a source… said.”

March 21 – Bloomberg (Silla Brush, Noah Buhayar and Allyson Versprille): “As Silicon Valley Bank deteriorated late last year and regulators began internally flagging flaws in its risk management, the lender opened up the credit spigot to one group: insiders. Loans to officers, directors and principal shareholders, and their related interests, more than tripled from the third quarter last year to $219 million in the final three months of 2022… That’s a record dollar amount of loans issued to insiders, going back at least two decades.”

Crypto Bubble Collapse Watch:

March 23 – Reuters (Hannah Lang): “The U.S. Securities and Exchange Commission… issued an investor alert warning that firms offering crypto asset securities may not be complying with U.S. laws. Unregistered offerings of such securities may not provide important data, including audited financial statements, for informed decision making, the SEC said. The securities watchdog has been cracking down on the crypto industry, which its chair has called a ‘Wild West’ riddled with misconduct.”

Ukraine War Watch:

March 22 – Reuters (Dan Burns): “Russia blasted an apartment block in Ukraine with missiles on Wednesday and swarmed cities with drone attacks overnight, in a display of force as President Vladimir Putin bid farewell to his visiting ‘dear friend’ and Chinese leader Xi Jinping.”

March 21 – Wall Street Journal (Laurence Norman): “The war in Ukraine has accelerated the unraveling of the international arms-control architecture painstakingly constructed from the Cold War onward, heightening concern among experts that a new nuclear arms race could emerge as decades of restraint on the numbers of nuclear weapons collapses. Russian President Vladimir Putin said last month that Moscow was suspending application of the New START agreement… Proliferation concerns are increasing globally, with Iran recently producing near-weapons grade enriched uranium and U.S.-North Korea negotiations over Pyongyang’s expanding weapons program stalled. There is talk among U.S. allies in South Korea and elsewhere of the need to re-examine their nonnuclear weapons policies in today’s more volatile era. Meanwhile, debate is heating up in Washington over the benefits of seeking future U.S.-Russia arms-control agreements in a world where China’s growing nuclear arsenal is free from any constraints and Beijing shows no interest in negotiating controls.”

March 21 – Associated Press: “Prime Minister Fumio Kishida made a surprise visit Tuesday to Kyiv, stealing some of the global attention from Asian rival President Xi Jinping of China, who met in Moscow with Russian President Vladimir Putin to discuss Beijing’s peace proposal for Ukraine that Western nations have already criticized. The two visits, about 500 miles apart, highlighted the nearly 13-month-old war’s repercussions for international diplomacy as countries line up behind Moscow or Kyiv. They follow a week in which China and Japan both enjoyed diplomatic successes that have emboldened their foreign policy.”

U.S./Russia/China/Europe Watch:

March 22 – Reuters: “Chinese President Xi Jinping and Russian President Vladimir Putin set their sights on shaping a new world order as the Chinese leader left Moscow…, having made no direct support for Putin’s war in Ukraine during his two-day visit. Xi made a strong show of solidarity with Putin against the West, but he barely mentioned the Ukraine conflict and said on Tuesday that China had an ‘impartial position’. There was no sign that Xi’s efforts to play the role of peacemaker had yielded results. Yet, as Xi departed he told Putin: ‘Now there are changes that haven’t happened in 100 years. When we are together, we drive these changes.’ ‘I agree,’ Putin said, to which Xi responded: ‘Take care of yourself dear friend, please.’”

March 20 – The Guardian (Pjotr Sauer and Amy Hawkins): “Xi Jinping said China was ready with Russia ‘to stand guard over the world order based on international law’ as he arrived for a state visit to Moscow that comes days after Vladimir Putin was made the subject of an arrest warrant by the international criminal court… ‘I am very glad, at the invitation of President… Putin, to come back to the land of our close neighbour on a state visit,’ Xi said upon arrival… ‘I am confident the visit will be fruitful and give new momentum to the healthy and stable development of Chinese-Russian relations.’ Xi added that with Russia, China was ‘ready to resolutely defend the UN-centric international system, stand guard over the world order based on international law’.”

March 22 – Financial Times (Editorial Board): “China called Xi Jinping’s visit to Moscow this week ‘a journey of friendship’. Few people know what China’s leader said privately in two days of talks with his ‘dear friend’ Vladimir Putin. There was little public sign, though, that he put any meaningful pressure on Russia’s president to end his war in Ukraine. Indeed, Beijing reinforced western impressions that it is firmly in Moscow’s camp. A joint statement to which Xi put his name on Tuesday did not demand that Russia withdraw its troops from Ukraine, honour Ukraine’s internationally recognised borders or even repeat the call for a ceasefire that Beijing made in a ‘position paper’ on the conflict last month. The statement said the ‘purposes and principles’ of the UN charter must be observed — but failed to condemn Moscow’s glaring violation of the article stating that UN members should refrain from the ‘use of force against the territorial integrity or political independence of any state’.”

March 23 – Wall Street Journal (Thomas Grove): “Chinese President Xi Jinping’s visit to Moscow—and the flurry of trade, energy and infrastructure deals discussed during his trip—has laid bare an increasingly uncomfortable truth for Moscow: In a relationship the Kremlin has long treated with the utmost caution, China is gaining the upper hand. The pomp-filled summit of Mr. Xi and Russian President Vladimir Putin showcased a growing challenge to the West. But since Moscow’s disastrous invasion of Ukraine…, Moscow has been forced to turn sharply to Beijing to keep the economy afloat. ‘They understand they can’t lose this war, and going deeper into the Chinese pocket is the price they’re willing to pay,’ said Alexander Gabuev, senior fellow at the Carnegie Endowment for International Peace. ‘Beijing is the quintessential lifeline that is keeping the economy going and getting weapons to the troops.’”

March 22 – Bloomberg (Jonathan Tirone): “China and Russia are deepening cooperation on a key atomic technology that has Pentagon planners on edge because of its potential to upset the global balance of nuclear weapons. Russian President Vladimir Putin and Chinese counterpart Xi Jinping announced a long-term deal to continue developing so-called fast-neutron reactors. The announcement came among a raft of agreements presented late on Tuesday following Xi’s three-day visit to Moscow… In December, the Kremlin-controlled nuclear giant Rosatom Corp. finished transferring 25 tons of highly-enriched uranium to China’s first fast reactor, the CFR-600 — a facility which analysts say could produce fuel for some 50 nuclear warheads a year.”

March 19 – Wall Street Journal (Georgi Kantchev and Evan Gershkovich): “Russian President Vladimir Putin hailed Moscow’s deepening political and economic relations with China and hit out at the West for trying to contain the two countries’ development… In an article for the Chinese Communist Party’s flagship newspaper, People’s Daily, Mr. Putin wrote that the two nations are ‘standing on the brink of a new era.’ ‘The Russia-China relations have reached the highest level in their history and are gaining even more strength,’ Mr. Putin wrote in the article… ‘They surpass Cold War-time military-political alliances in their quality, with no one to constantly order and no one to constantly obey, without limitations or taboos.’”

De-globalization and Iron Curtain Watch:

March 22 – Bloomberg: “Russia’s central bank said its bullion holdings jumped by 1 million ounces over the past year as it bought gold in the face of Western sanctions. The Bank of Russia said it held 74.9 million ounces of gold at the end of February… up from 73.9 million a year earlier. That bullion hoard was worth $135.6 billion… The central bank was once the biggest sovereign buyer of gold, scooping up almost all of the country’s mined output before pausing purchases in early 2020.”

Inflation Watch:

March 22 – CNN (Olesya Dmitracova and Hanna Ziady): “UK consumer prices jumped by 10.4% in February compared with a year ago, as food inflation hit its highest level in more than 45 years, and as the cost of visiting restaurants and hotels increased… Food prices soared 18.2% through the year to February, the sharpest rise since the late 1970s… The surprise uptick in inflation in February follows months of deceleration since the pace of price rises reached a 41-year high of 11.1% in October.”

Biden Administration Watch:

March 20 – Bloomberg (Saleha Mohsin and Sridhar Natarajan): “US officials are studying ways they might temporarily expand Federal Deposit Insurance Corp. coverage to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis. Treasury Department staff are reviewing whether federal regulators have enough emergency authority to temporarily insure deposits greater than the current $250,000 cap on most accounts without formal consent from a deeply divided Congress, according to people with knowledge of the talks.”

March 21 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen told bankers on Tuesday that she is prepared to intervene to protect depositors in smaller U.S. banks suffering deposit runs that threaten more contagion amid the worst financial system turmoil in more than a decade. In a speech aimed at calming nerves rattled by two prominent bank failures this month, Yellen said that the U.S. banking system was stabilizing and steps taken to guarantee deposits in those institutions, showed a ‘resolute commitment’ to ensure depositors’ savings and banks remain safe. ‘The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system,’ Yellen told an American Bankers Association conference… ‘And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion’… in prepared remarks that drew a standing ovation from the assembled bankers…”

March 22 – Reuters (David Lawder and Rami Ayyub): “U.S. Treasury Secretary Janet Yellen told lawmakers on Wednesday that she has not considered or discussed ‘blanket insurance’ to U.S. banking deposits without approval by Congress as a way to stem turmoil caused by two major bank failures this month. Her comments before a Senate Appropriations subcommittee hearing dashed industry hopes for a quick government guarantee to stem the threat of further bank runs and contributed to a 15.5% fall in the shares of struggling First Republic Bank on Wednesday. Some banking groups have urged the Biden administration and the Federal Deposit Insurance Corp (FDIC) to temporarily guarantee all U.S. bank deposits… Reuters reported on Tuesday that government officials discussed the idea of raising the $250,000 insurance limit per depositor without congressional approval following the SVB and Signature closures.”

March 22 – Financial Times (James Politi and Nicholas Megaw): “US Treasury secretary Janet Yellen ruled out a broad expansion of deposit insurance to protect savers with balances above $250,000 in the near term, comments that fuelled another sell-off in shares of smaller US banks. Speaking at a Senate hearing on Wednesday afternoon, Yellen said there could be ‘reasoned discussions’ on whether the current $250,000 limit for insured deposits should be lifted as part of long-term systemic reforms. But the Treasury secretary said that in the current turmoil, the Biden administration was not considering a move to broaden deposit insurance, something that would require congressional approval unless the Treasury found a way to implement it unilaterally. ‘I have not considered or discussed anything to do with blanket insurance or guarantees of deposits,’ Yellen said.”

March 20 – Bloomberg (Austin Weinstein and Max Reyes): “House conservatives said they would oppose any universal guarantee of bank deposits above the current $250,000 FDIC insurance cap, even as other lawmakers said they’re weighing a statutory increase in the limit following two recent bank collapses… ‘Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules,’ the Freedom Caucus said…. The group also said the US Federal Reserve should phase out its new lending program that aided Silicon Valley Bank and Signature Bank ‘as soon as possible.’”

March 22 – Bloomberg (Courtney McBride): “Secretary of State Antony Blinken told senators… that the State Department needs its full budget request to tackle ‘the immediate, acute threat posed by Russia’s autocracy and aggression’ and ‘the long-term challenge from the People’s Republic of China.’ But senators said the 11% budget increase sought for the department and the US Agency for International Development will be a tough sell, especially in the Republican-led House.”

Federal Reserve Watch:

March 22 – Bloomberg (Catarina Saraiva and Steve Matthews): “The Federal Reserve raised interest rates at a ninth straight meeting and indicated there may be more hikes to come in a clear sign it’s confident that its bid to quell inflation won’t deepen a nascent banking crisis… ‘We are committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so,’ Chair Jerome Powell said… ‘It is important that we sustain that confidence with our actions as well as our words.’ Officials are prepared to raise rates higher if needed, he said.”

March 19 – New York Times (Jeanna Smialek): “Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year… The Fed repeatedly warned the bank that it had problems, according to a person familiar… In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as ‘matters requiring attention’ and ‘matters requiring immediate attention,’ flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble. But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls.”

U.S. Bubble Watch:

March 23 – Associated Press (Matt Ott): “The labor market continues to defy Federal Reserve attempts to cool hiring, with U.S. applications for unemployment benefits down again last week and remaining at historically low levels. Jobless claims in the U.S. for the week ending March 18 fell by 1,000 to 191,000 from the previous week… The four-week moving average of claims… fell by 250 to 196,250, remaining below the 200,000 threshold for the ninth straight week.”

March 22 – Reuters (Dan Burns): “Last week’s banking sector turmoil had at least one silver lining for U.S. home buyers: lower mortgage interest rates. Interest rates on the most popular U.S. home loan tumbled by the most in four months last week after the failure of Silicon Valley Bank and emergency measures taken to shore up the wider banking system drove a mad dash by investors to the safety of government bonds… The resulting drop in yields on the Treasury notes that act as benchmarks for home loans pushed the average rate on 30-year fixed-rate mortgages down by 0.23 percentage point to 6.48% for the week…”

March 21 – CNBC (Diana Olick): “Sales of previously owned homes rose 14.5% in February compared with January, according to… the National Association of Realtors. That put sales at an annualized rate of 4.58 million units. It was the first monthly gain in 12 months and the largest increase since July 2020… Sales were, however, 22.6% lower than they were in February of last year… Sales might have been even higher were it not for what is still very low supply. There were just 980,000 homes for sale at the end of February…, flat compared with January. At the current sales pace, that represents a 2.6-month supply. A balanced market between buyer and seller is considered a 4- to 6-month supply.”

March 23 – Bloomberg (Reade Pickert): “Sales of new US homes unexpectedly rose in February after a downward revision to the prior month, suggesting the housing market is beginning to stabilize after a tumultuous year. Purchases of new single-family homes increased 1.1% to an annualized 640,000 pace after a 633,000 rate in January… There were 436,000 new homes for sale as of the end of last month, the lowest since April. That represents 8.2 months of supply at the current sales rate.”

March 21 – Wall Street Journal (Nicole Friedman): “The first year-over-year drop in home prices in more than a decade and a dip in mortgage rates snapped a yearlong streak of declining monthly home sales, showing the effects of the Federal Reserve’s campaign to raise interest rates… The national median existing-home sale price fell 0.2% in February from a year earlier to $363,000, the first year-over-year decline since February 2012.”

Fixed Income Watch:

March 18 – Bloomberg (Olivia Raimonde): “As the banking crisis this past week largely brought corporate bond and loan offerings to a halt, borrowing costs for junk-rated issuers surged, tipping the market value of debt for some of the most vulnerable companies into distressed levels. The average yield spread… on US bonds with the worst credit ratings vaulted past 1,000 bps. Leveraged loans — the other main financing option for risky companies — plunged to a 10-week low, and companies pulled debt deals at the fastest pace in a year as buyers fled. ‘When high-yield companies come up for air, they are going to see much tighter financial conditions,’ said Michael Anderson, head of US credit strategy for Citigroup Inc. ‘This is a pretty big shock to the financial system.’”

China Watch:

March 21 – Bloomberg (Anjani Trivedi): “For all the talk of China’s post-Covid economic revival and sweeping changes at the top, Beijing’s biggest problems are (still) its small and medium companies. As China walks a fine line with its 5% growth target, these firms have a big role to play: They make up large swathes of the manufacturing and industrial complex, contribute around 60% of gross domestic product, and account for a significant chunk of exports. Beijing began talking up measures to help small and medium enterprises, or SMEs, in January this year… But SMEs remain stuck in the doldrums. As of February, a gauge of current performance, based on factors like production, new orders, investment, inventories and profitability, was close to multiyear lows. The upbeat growth rhetoric of late hasn’t helped boost the mood.”

March 22 – Bloomberg (Wei Zhou and Erin Hudson): “China Evergrande Group, once among China’s biggest developers and now a poster child for its property crisis, laid out details of a multi-billion dollar restructuring plan that calls for its offshore creditors to swap their debt for new securities… Evergrande credit investors can receive new notes maturing in 10 to 12 years or a combination of new debt and instruments tied to the shares of Evergrande’s property-services unit, its electric-vehicle division or the builder itself…”

March 20 – Bloomberg: “Shares of China Huarong Asset Management Co. plunged Monday after the bad-debt manager forecast a massive loss for last year. The Beijing-based company expected a net loss of about 27.6 billion yuan ($4 bn) for 2022…, attributing the shortfall to factors including volatility in the capital market that led to declines in the value of some assets. Shares of Huarong tumbled as much as 9.3% in Hong Kong in early trading on Monday…”

March 23 – Financial Times (Joe Leahy): “China’s population of super-rich fell more than 14% last year as President Xi Jinping’s zero-Covid policy, regulatory crackdowns and a property collapse took their toll on the nation’s large fortunes. The number of billionaires in China fell by 164 to 969 compared with a decline of 25 to 691 in the US, according to the 2023 M3M Hurun Global Rich List… ‘This past year has been tumultuous for wealth creation,’ the report said. While China was still the ‘world capital for billionaires’, the total wealth of the country’s richest plunged 15%.”

March 20 – Bloomberg: “Signs of a cash squeeze are appearing in China as the quarter-end approaches, underscoring how the nation’s economic rebound is driving demand for loans and prompting the central bank to ease policy. The overnight repurchase rate, an indicator of interbank funding costs, climbed to the highest level since February 2021 on Tuesday. Short-term liquidity is becoming more scarce in the interbank market, as lenders set cash aside for quarter-end regulatory checks and disburse more loans amid a recovery fueled by a reopening of the economy.”

\March 21 – Bloomberg: “The cost to borrow overnight in Hong Kong jumped the most in at least 17 years, with market watchers pointing to stress in the global financial system as well as cash hoarding by banks ahead of… quarter-end. The overnight Hong Kong interbank offered rate, known as Hibor, surged 253 bps to 4.14% on Tuesday. That’s biggest gain since data compiled by Bloomberg that began in 2006. The one-month gauge increased by 51 bps, the most since 2008.”

Central Banker Watch:

March 22 – Bloomberg (Jana Randow and Alexander Weber): “The European Central Bank will take a ‘robust’ approach that allows it to respond to inflation risks as needed but also aid financial markets if threats emerge, according to President Christine Lagarde. ‘Bringing inflation back to 2% over the medium term is non-negotiable,’ she told a conference of ECB watchers… ‘We will do so by following a robust strategy that is data-dependent and embeds a readiness to act, but that does not entertain trade-offs around our primary objective.’”

March 20 – Bloomberg (Alexander Weber): “The European Central Bank doesn’t see any conflict between its inflation-targeting mission and its responsibility to stave off financial-system threats, President Christine Lagarde said. ‘Price stability goes with financial stability, and they are both present and come together — but there is no trade off,” she told lawmakers… ‘Financial stability to the extent that it impacts the economic situation, to the extent that it impacts our projections, has an impact on how we see the situation from a macroeconomic point of view, but they are two different stabilities addressed by different tools.’”

March 22 – Financial Times (Martin Arnold): “Germany’s central bank boss said the eurozone must be ‘stubborn’ and keep raising borrowing costs to tackle inflation, as rate-setters on both sides of the Atlantic wrestle with the recent turmoil in the financial sector. ‘Our fight against inflation is not over,’ Joachim Nagel, Bundesbank president, told the Financial Times… ‘There’s certainly no mistaking that price pressures are strong and broad-based across the economy,’ Nagel said of the eurozone. ‘If we are to tame this stubborn inflation, we will have to be even more stubborn.’”

March 23 – Financial Times (Delphine Strauss and Oliver Ralph): “The Bank of England has increased interest rates by a quarter of a percentage point to 4.25%, despite the turmoil that has engulfed banking in recent weeks. The rise… comes a day after data showed that the annual rate of inflation jumped from 10.1% to 10.4% in February. It is the 11th consecutive increase from the bank, which started raising rates in December 2021. But the BoE has left its options open on whether to raise interest rates any further in future meetings…”

March 23 – Bloomberg (Bastian Benrath): “The Swiss National Bank raised its interest rate by 50 bps and signaled more to come as it resumed its inflation fight just days after the downfall of the country’s second-biggest bank became the epicenter of global financial turmoil. Officials lifted the benchmark to 1.5%… ‘It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term,’ Thomas Jordan said…”

March 20 – Bloomberg (Swati Pandey): “Australia’s central bank will consider pausing its policy tightening cycle next month, given interest-rate settings are already restrictive and the economic outlook is uncertain, minutes of its March meeting showed. The Reserve Bank delivered its 10th consecutive rate hike two weeks ago to take the cash rate to 3.6% as it judged inflation is still ‘too high’ and the labor market ‘very tight’… Even so, the board returned to the question of standing pat during its discussions.”

Global Bubble Watch:

March 21 – Reuters (Sumeet Chatterjee): “Asian lenders may find it difficult to replenish their capital by issuing Additional Tier-1 (AT1) bonds, Citigroup said in a research note…, after the Swiss authorities’ move to wipe out Credit Suisse bonds as part of its takeover deal. The challenge will be particularly acute for a large number of smaller banks in Asia more reliant on AT1s compared with Western peers due to tighter regulatory liquidity requirements.”

March 23 – Reuters (Chavi Mehta): “Accenture Plc lowered its annual revenue and profit forecasts and decided to cut about 2.5% of its workforce, or 19,000 jobs, the latest sign that the worsening global economic outlook was sapping corporate spending on IT services.”

Europe Watch:

March 23 – Reuters (Lucien Libert and Stephane Mahe): “Protesters angry with President Emmanuel Macron and his plan to raise the pension age blocked access to an airport terminal, sat on train tracks, clashed with police and threw projectiles at a police station in a day of demonstrations across France. Police fired tear gas at protesters in the western city of Nantes. In Rennes, they used water cannon, BFM TV footage showed.”

Japan Watch:

March 22 – Reuters (Tetsushi Kajimoto): “Big Japanese manufacturers remained pessimistic about business conditions for a third straight month in March, the closely watched Reuters Tankan survey showed… Service-sector firms’ mood rebounded in a sign of domestic demand-driven recovery, in which the prospects of higher wages among big firms at the spring labour talks may encourage households to spend their way out of the COVID-induced doldrums.”

EM Crisis Watch:

March 23 – Bloomberg (Sam Kim): “South Korea’s property market risks an accelerated slide triggered by quirks in renting practices… The vulnerability stems from the common choice of tenants to stump up outsized deposits known as jeonse for landlords instead of paying monthly rent. This widespread practice supplies property owners with leveraged cash, putting jeonse at the heart of real estate speculation and financial imbalances in the country. Deposits for an apartment in Seoul peaked at almost 678 million won ($530,000) last year. Those who don’t have sufficient savings for the deposits can take out special bank loans, adding a fault line to an ecosystem that gooses the market on the way up, while potentially magnifying losses when things turn down.”

Leveraged Speculation Watch:

March 20 – Bloomberg (Nishant Kumar and Hema Parmar): “Said Haidar is set for the biggest-ever monthly decline at his hedge fund in more than two decades as wild bond markets rock macro traders. His Haidar Jupiter fund slumped an estimated 32% this month through Friday, according to people with knowledge of the matter. The decline puts the macro strategy down 44% this year…”

Geopolitical Watch:

March 23 – Associated Press (Vladimir Isachenkov): “A top Russian security official warned Thursday about the rising threat of a nuclear war and blasted a German minister for threatening Russian President Vladimir Putin with arrest, saying that such action would amount to a declaration of war and trigger a Russian strike on Germany. Dmitry Medvedev, the deputy secretary of Russia’s Security Council chaired by Putin, said… that Russia’s relations with the West have hit an all-time bottom. Asked whether the threat of a nuclear conflict has eased, Medvedev responded: ‘No, it hasn’t decreased, it has grown. Every day when they provide Ukraine with foreign weapons brings the nuclear apocalypse closer.’”

March 20 – Reuters (Hyonhee Shin): “North Korean leader Kim Jong Un has overseen drills simulating a nuclear counterattack against the U.S. and South Korea in a warning to the allies who are scaling up their joint military exercises, state media KCNA said… The North’s drills involved a short-range missile launch but – unusually – the missile flew from a buried silo, which analysts say would help improve speed and stability in future tests of intercontinental ballistic missiles (ICBM).”

March 18 – Reuters (Heekyong Yang): “North Korea claims that about 800,000 of its citizens volunteered to join or reenlist in the nation’s military to fight against the United States, North Korea’s state newspaper reported… ‘The soaring enthusiasm of young people to join the army is a demonstration of the unshakeable will of the younger generation to mercilessly wipe out the war maniacs making last-ditch efforts to eliminate our precious socialist country, and achieve the great cause of national reunification without fail and a clear manifestation of their ardent patriotism,’ the North’s Rodong Sinmun said.”

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