S&P500 price is relatively flat given all the extraordinary headlines and high trading volumes. All eyes are on the banking sectors as they dropped significantly this week. Nasdaq outperformed S&P500 as there were outflows from the financial sector. 2Y treasury yield recorded the biggest decline since the market crash in 1987.
ECB: This week, ECB went ahead with a 50bps rate hike. Market was hoping for monetary relief but the act of the ECB was a signal that the inflation projection is going to stay high for a long time.
BTFP: In response to the recent banks' crisis, Fed launched the Bank Term Funding Porgramme (BTFP) backstopped by $25 billion. It allows banks to raise term funding by putting collateral such as treasury at par value even if it is below par value. In other words, banks can fund deposit outflows without selling securities at bad prices.
Lifeline: First Republic Bank (FRB) was facing a withdrawal crisis after the collapse of Silicon Valley Bank and Signature Bank. In this case, FRB has around two-thirds of its deposits uninsured and a 111% liability-to-deposit ratio. To maintain the stability of the banking system, several big banks deposit 30 billion to FRB. Amid the chaos, investors rushed to find safer ways to protect against the significant deposit outflows, which are likely to be the money market funds.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Non-bank cyclical stocks are only having a mild reduction in expectation of growth. We believe energy stocks have upside potential when the growth of the economy is resilient. If the economy keeps slowing down, investors may allocate more capital to quality instead of growth stocks as they have higher margins and returns on capital.
Standard Chartered: We recommend European financials given its cheap valuations, strong balance sheet and better macroeconomic environment in Europe. However, we suggest being cautious now as fundamentals are uncertain and prices can overshoot during volatile periods.
Morgan Stanley: The economy is less sensitive to interest rate changes because of the strength of the balance sheet. It is going to make the job of the Fed harder and take higher fed fund rates to tame inflation. Therefore, rates may need to rise higher for longer.
HSBC: Treasuries dropped after the announcement of the rescue plan in the banking sector. Investors were assessing the implication of the 50bps hike of the ECB for the Fed policy decision. Meanwhile, upbeat data roll out such as the housing and weekly jobless claims in the US.
Goldman Sachs: Expectation of rate hikes has changed because of the stress in the banking system. Terminal rates dropped to 4.86%. Some of the forecasts are even expecting a pause in the next meeting.
Standard Chartered: The increasing financial stress reinforced the view of an imminent recession. Regulatory costs will increase specifically for mid and small-size banks and the competition in the deposits could probably reduce the net interest income.
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