- Yields in Lehman-style collapse as SVB rocks financial sector
- NFP mixed bag; CPI next key focus area
- Dilemma for Powell
Risk OFF but markets off lows
At the time of writing, the markets were recovering on bargain hunting, but remained to be seen whether the rebound would hold followed the big risk off remained observed earlier in the day.
Earlier, the short-term bounce we saw post NFP in index futures were wiped off fairly quickly and the selling continued once cash markets opened. The S&P financial index plunged. The risk-off sentiment deepened today as SVB trading was suspended after a 60%-plus drop in its shares, following news that the attempt by the bank to raise capital failed. Other small US lenders also saw their share plummet – especially after Janet Yellen said the US Treasury was monitoring a “few banks” in aftermath of SVB’s chaos. In response, investors piled into safe haven assets – government bonds, gold and yen. FX investors rushed into gold, yen and Swiss franc, while risk-sensitive commodity dollars were sold against the likes of the euro and pound, which also managed to recover strongly as the dollar sold off.
Yields in Lehman-style collapse
When bond markets move, investors in other markets always take notice. The 2-year Treasury yield fell about 45bps from yesterday's highs to record its biggest 2-day decline since September 200 – the year when Lehman collapsed. The collapse in yields is mainly a reflection of investor concerns about the US financial sector.
Dilemma for Powell
The big rally in government bonds is a reflection of investors concerned about another Lehman-style collapse in the financial sector. So, it is a tough task for Jerome Powell. The dilemma is that if he opts for more hikes, there is a risk that some regional banks might collapse, while not doing anything could exacerbate inflationary pressures again. Judging by market reaction today, the market feels like whatever they do, the economy is going to take a hit regardless.
SVB root cause behind sell-off
Concerns grew over the health of the US banking system this week after Silicon Valley Bank (SVB) saw its shares plunge as it announced plans to shore up its finances, while Silvergate Capital collapsed amid the crypto turmoil. Shares in global financial companies fell on fears of contagion.
NFP mixed bag; CPI next key focus area
There is a risk that if the Fed continues its rate hikes, more problems might surface as people struggle to pay debt amid high interest rates. Those concerns may intensify if Fed opts for a 50 basis-point rate hike this month. And that could be determined by the outcome of next week’s CPI release, after today’s publication of the nonfarm payrolls report triggered a mixed reaction.
The big takeaway from the jobs report was that the headline NFP beat expectations for 10th consecutive month, but wages grew less than expected and the unemployment rate climbed. It was a mixed report overall, but FX markets sold the dollar and the initial bounce we saw in index futures. Bond markets signaled risk-off. Yields dropped as investors piled into government debt. This was always going to happen because of the extreme levels they had push yields to.
Markets will focus on CPI next week to decide whether the FOMC will opt for 25 or 50 bps rate hike on March 22.
For now, risk is off the menu – and indices could drop further especially as several technical support levels have started to breakdown, thereby leading to more and more technical selling.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R