Marketmind: Shock and awe - or mayday?
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[March 17, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Markets are struggling with whether to be relieved by the sheer scale of
Thursday's U.S. bank rescue or be terrified by it.
Slightly punch drunk from a week of withering bank runs, stock price
plunges, emergency bank bailouts and then a hefty European Central Bank
interest rate rise into the mix, an eerie calm descended over world
markets first thing Friday.
But there was little confidence the rising financial stress would
dissipate quickly from here.
Large U.S. banks injected $30 billion in deposits into failing First
Republic Bank on Thursday, swooping in to rescue the lender caught up in
a widening crisis triggered by the collapse of two other mid-size U.S.
lenders this week.
Marshalled by U.S. Treasury Secretary Janet Yellen, Federal Reserve
chief Jerome Powell and JPMorgan boss Jamie Dimon, the rescue involved
the largest U.S. banks - JPMorgan, Citigroup, Bank of America, Wells
Fargo, Goldman Sachs and Morgan Stanley.
But worryingly, First Republic's shares - which have lost more than 70%
in 10 days - continue to fall and were down another 15% again in
pre-market trading.
The move came the same day as Switzerland's central bank was forced to
shore up the country's second biggest lender Credit Suisse by offering
it $54 billion of emergency liquidity as the battered bank has been
ensnared by the anxiety surrounding the U.S. bank shock.
But Credit Suisse shares resumed their decline again on Friday too,
dropping over 3% first thing even as European bank stocks clawed back
about 1% as Wall St futures hovered little changed following Thursday's
relief rally. The VIX volatility index remained off the week's highs but
stuck at 23.
Fed data showed the extent of the panic over the past week and how it
potentially compromises its monetary policy tightening and balance sheet
reduction as it prepares to deliver what futures markets now assume will
be another quarter-point rate hike next week - even if the last of the
cycle.
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A trader works at the post where First
Republic Bank stock is traded on the floor of the New York Stock
Exchange (NYSE) in New York City, U.S., March 16, 2023.
REUTERS/Brendan McDermid
Banks took an all-time high $152.9 billion from the Fed's
traditional lender-of-last resort facility known as the discount
window as of Wednesday, while also taking $11.9 billion in loans
from the Fed's newly created Bank Term Lending Program. The discount
window jump crashed through a prior record of $112 billion during
the banking collapse of 2008.
Not unlike the Bank of England's government bond market intervention
last Autumn, the move bamboozles the Fed's quantitative tightening
program of balance sheet reduction.
After peaking at just shy of $9 trillion last summer, overall bond
holdings had fallen to $8.39 trillion on March 8, before moving up
to nearly $8.7 trillion on Wednesday - the highest since November.
Markets are caught in the uncertainty of what happens next.
Having pushed higher amid all the rescue attempts on Thursday,
2-year U.S. Treasury yields clung to 4% on Friday -- still down
almost a percentage point from where they were little over a week
ago. What's more, 75 basis points of Fed rate cuts are still priced
between a peak of 5% in May to yearend.
The dollar was slightly lower.
On top of all the policy head fakes and emergency moves, China's
central bank said on Friday it would cut the amount of cash that
banks must hold as reserves for the first time this year to release
liquidity and support the economy.
Key developments that may provide direction to U.S. markets later on
Friday:
* US Feb industrial and manufacturing production, capacity
utilization and leading economic index; March University of Michigan
sentiment;
* Canada Feb producer prices
(By Mike Dolan, editing by Raissa Kasolowsky mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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