Market Review 03/2023

The central event of the month was the bankruptcy of two regional banks in the US, which occurred in less than a week. Almost simultaneously, the European financial system was also shaken, resulting in the takeover of Credit Suisse by UBS. We would like to note that the American system has demonstrated composure and the ability to respond quickly to a crisis situation. The Federal Reserve almost immediately provided the necessary liquidity, the Federal Deposit Insurance Company (FDIC) said it would guarantee all deposits in the bankrupt banks and the Biden administration drafted new rules for regional banks that include tighter controls on liquidity and capital adequacy.

There is no reason to panic

The deal between the Swiss banks went less smoothly as the rights of holders of AT1 perpetual bonds were not respected Credit Suisse shareholders received UBS shares through conversion, while AT1 bondholders lost their investment in full, so it is already clear that Swiss National Bank will face serious litigation procedures.

As a result of the turmoil, the financial sector of the S&P 500 index lost almost 10% over the month (in the Russel 2000 and NASDAQ indices the losses of the sector were much higher), and European banks (the FTS Eurofirst 300 Banks index) lost 14.06%. The turmoil in the US banking system may continue, but as long as the money remains inside the financial system, investors should not have reasons to panic, as shown by the values of the US and European stock indices. Depositors of regional banks in this crisis redistributed withdrawn deposits to larger US banks, which, with their interbank deposits, supported some other regional banks facing liquidity drain. Another part of that money flow went to money market funds, which, in turn, increased purchases of US tresuries.

European and US equity markets

Silver and gold hit their short-term targets; oil prices jump amid OPEC decision

Fears of a possible banking crisis certainly helped precious metals. For months, we were waiting for silver to start performing and it finally did. March saw 20% price rally in the metal, stopping at 24 dollars per troy ounce right on the resistance trend line from early 2020. Market has tested this trend line six times already (and obviously failed to break), which adds to its importance. Once we move past it, XAG/USD 28-29 area will be on the cards. Gold tested levels just above USD 2000 per troy ounce for the third time in history. It might take a few more battles for the bulls to break that triple top decisively, and since banking crisis is off the cards at least for some time, then we might see some near term correction / consolidation near these levels.

Gold price, USD/oz

Oil price has been in a downtrend since as long as last March. Overall, this pattern looks like a counter trend correction with a probable bull-run resumption (back to $140 and possibly beyond), though timing it is, as always, hardly possible. Last month we mentioned declining volatility in oil (normal occurrence before a strong directional move). Well, in the first weekend of April OPEC decided to cut production, what triggered 8% move in price on Monday opening. We cannot know if this decision will produce a lager move higher, but bears certainly must be very careful.

Benchmark 10-year bond yields

Biggest economies continue to struggle

Weak export orders were the reason for China’s manufacturing sector losing momentum –Caixin/S&P Global manufacturing PMI decreased by one and a half points to 50.0 in March. While the sector has stabilized following the end of the stringent pandemic measures, it still faces increasing headwinds from sluggish order growth and weak overseas demand. In contrast, services sector continued its rebound, with non-manufacturing PMI increasing to 58.2 points compared to 56.3 in February, its highest level since May 2011.

As new orders continued to decrease, US manufacturing activity reached its lowest level in nearly three years, with only petroleum, coal products and machinery industries showing some growth in March. Meanwhile US consumer sentiment decreased for the first time in four months – the University of Michigan’s monthly Consumer Sentiment Index dropped to 62 points in March compared to 67 points in February. Still, US labor market remained strong, showing that tighter credit conditions are yet to have a significant effect.

A downturn in Eurozone factory activity continued – S&P Global final manufacturing PMI decreased to 47.3 points in March compared to a reading of 48.5 a month ago. Demand for goods is still falling as tighter monetary policy and surging cost of living are biting consumers. Input prices, however, fell for the first time since July 2020 due to lower energy costs and improved supply chains. Eurozone headline inflation data came in lower than expected, but core inflation increased. According to Eurostat, consumer prices in March increased by 6.9% on an annualized basis, slowing from an 8.5% increase in February. Economic sentiment also deteriorated as optimism in industry and services sectors fell.

High Yield bond Indexes

Waiting for a “tell”

Central bankers continue to say that fighting inflation remains their main goal, while responding to a crisis in the banking system is a separate task that is being solved using other tools. By itself, the crisis of regional banks might in addition help with solving that main goal, as it will cause a decrease in lending in US, which means that consumer demand and inflation will decrease.

We are constantly watching for that “real tell” of possible local top in bond yields. During mini-crisis in March govies acted as both safe haven and a speculative bet, but since the scenario with a massive banking crisis is off the cards, we could expect some consolidation in yields ahead of next Fed and ECB meetings as part of larger bond price bottoming process. In our portfolios, we are still looking to move to a bit longer maturities closer to summer months.