Market Commentary: Week of March 20, 2023

Last Week

If you were sick and tired of talking and thinking about inflation, you got a well-deserved break last week as a twin domestic and global banking crisis erupted. The week began Sunday afternoon when the FDIC announced that all depositors were insured no matter what the size of their deposits and the Fed launched a new facility that would lend at par against banks and credit union Treasury, Agency, and Agency MBS securities, thus protecting against bank runs.

Unfortunately, one big problem bank experiencing huge deposit outflows, First Republic Bank, had hardly any securities to pledge. As rating agencies downgraded the bank, the largest banks in the U.S., with the blessing (pleading?) of the Treasury, deposited $30 billion in deposits at First Republic to provide immediate liquidity. Unfortunately, this action didn’t calm things down for long, and, as we closed out the week, the problems at First Republic remained as unsettling questions about the liquidity of the nation's banks and credit unions.

Meanwhile, the slow-motion trainwreck that has been Credit Suisse reared up again as the marketplace signaled a vote of no confidence in the viability of the bank. While Credit Suisse was definitely a “Too Big to Fail” institution, it appeared by week’s end that the Swiss National Bank was holding a shotgun marriage between UBS and CS, throwing a few billion Swiss Francs into the mix to cover for any future disasters left inside CS and the potential crisis would be contained.

The week’s activity caused violent gyrations in the Treasury yield curve as 2s 10s continued to re-steepen. Commodities, particularly industrial commodities, fell hard as the potential for a credit-induced hard-landing entered the picture. Stocks indices managed to gain for the week with the NASDAQ leading the way.

• The S&P 500 rose 1.45% for the week. The average daily move was 1.07%.
• The NASDAQ increased by 4.1% for the week. The average daily move for the week was 1.17%.
• The 2-year Treasury yield plunged 75 basis points, closing at 3.85% on Friday. High year-over-year 5.07%, low yield 2.1%.
• The 10-year Treasury yield dropped 27 basis points for the week, closing at 3.43% on Friday. Year-over-year high yield 4.24%, low yield 2.29%.
• The VIX Index advanced 2.87% for the week, closing at 25.51 Friday. Year-over-year high 36.45 and low 17.87.
• The MOVE Index jumped 28.6% for the week, closing at 180.11 on Friday. On Wednesday, the index hit a new year-over-year high of 198.71. Year-over-year high of 198.71 and low of 91.76.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 4 basis points for the week closing at 88 basis points Friday. High spread Year-over-year high of 111 and low of 64.
• High Yield corporate debt (as measured by Markit CDX) spreads rose 32 basis points, closing at 530 basis points on Friday. Year-over-year high 627, and low 355.
• U.S. Dollar Index ended the week down by 0.76% at 103.71 on Friday. Year-over-year high 114.11 and low 97.79.
• WTI Crude crashed 12.82% for the week, using the May WTI Futures contract, closing at 66.93 Friday. Year-over-year high 123.70, and low 66.74.
• Gold, as measured by the April futures contract 5.70% for the week closing at 1,974 on Friday. High price for the front contract year-over-year is 2,043 and the low is 1,623.
• Bitcoin increased 33.44% for the week closing at 26,823 on Friday. High price year-over-year 47,967 and low 15,632.

The Week Ahead

We come in this morning with another flight to quality rally in rates. The 2-year Treasury note is plumbing new local lows, down about 8 basis points in yield to 3.75%

Over the weekend Credit Suisse was purchased by one-time arch-enemy UBS for 3.2 billion Swiss Francs. Much to their surprise, holders of $ $17 billion of Credit Suisse AT1 “bail-in bonds” got bailed in and wiped out. It seems the holders of these bonds are perplexed that they have been wiped out while equity holders are at least getting something out of the deal. Security law attorneys are gleeful as they pour through the deal details to either confirm or challenge the deal waterfall.

Meanwhile, in the United States, First Republic Bank continues to wobble as S&P downgraded the bank’s debt from BB+ to B+. In the middle of this turmoil, the Fed holds its FOMC meeting Tuesday and Wednesday.

Suddenly, the Fed’s clear path to the inflation fight has been muddied, to say the least. Most still believe the Fed will hike the policy rate 25 basis points for a 4.75%-5% target. The Chairman’s press conference will be must-see TV now that multiple items in the financial china shop have begun to break. Should be a hoot!

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.• The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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