Weekly Market Update (March 26, 2023)
Equity markets remain strong despite all the banking stress headlines. Nasdaq has outperformed S&P500 since March. Treasury yield, especially the shorter-duration bonds fell again this week, due to the lower likelihood of rate hikes and a higher likelihood of rate cuts later this year. More inflows rushed into money markets as the demand for cash is high in this market environment, reflecting that investors prefer lower-risk and yield-bearing assets.
Fed: FOMC hiked rates by 25bps aligned with consensus. Powell mentioned that the tight credit condition is harmful to the economy and could possibly substitute for further rate hikes. He also said a rate cut should not be expected this year. However, the market is pricing a 90bps of cuts from now to the year-end. The expected effective fed fund rate is 3.90% while the fed’s forecast is 5-5.25%.
Credit Condition: The tighter credit condition that is driven by the banking stress will lead to a decline in lending in the US and Europe. Over the previous weeks, Fed, ECB and BoE have all raised their rates, while they emphasized that further rate hikes will depend on the economic data and market conditions.
AT1: The Swiss regulator decided to write down the AT1 bonds, the largest write-down of the asset class. Other authorities like ECB, BoE, HKMA and MAS made announcements over the past few days that they are not going to act like SNB and would impose losses on equity holders before bondholders. AT1 bond prices recovered partially after the statements while investors are still going to demand a higher risk premium for holding the asset.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: The average large-cap mutual funds underweight the largest tech stocks due to the diversification limits from regulators and fund mandates. Mutual funds’ performance is lagging behind because of the outperformance in large tech stocks, and the underweight widens continuously. Some funds bought back some tech stocks to reduce underweight may have contributed to the recent jump in prices of mega-tech stock.
J.P. Morgan: Growth stocks outperformed value stocks due to the lower weighting to financial stocks and pivot back to tech stocks due to the lower tightening expectation of the Fed. The high exposure to bank stocks will be a headwind for value stocks in the near term.
Goldman Sachs: Market is pricing a rapid easing that will follow the peak and expect 100bps of cuts by year-end. We do not agree with the repricing as the front-end inversion is deeper than warranted. We believe the preexisting inversion in the forwards already factored in the tightening credit condition and moderating inflation.
Standard Chartered: Credit spreads of senior secured bonds for European banks remain unchanged, implying there is limited fear of a crisis in the banking sector. It is not likely to see widespread contagion as regional bank bonds only account for a small fraction of the whole market.
Morgan Stanley: The recent banking stress is not a repeat of the 2008 financial crisis, which arose from asset quality and systematic credit issues. The recent one is about the deposit liabilities management under the high rate environment. We think the policymakers can deal with liquidity squeezes.
Barclays: Central banks including Fed and ECB implemented “dovish hikes”, which is a signal of financial stability. They are assuming the tighter lending conditions of banks will slow down economic activities but not to the extent of a deep recession.
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