Market Musings 260323: No Let-up In Banking Stress, Yet

26th Mar '23 by Edmund Shing

5 comments 1477 reads

Market Musings 260323:
No let-up in banking stress, yet

Gold is potentially breaking out to a new all-time high…

Summary:

Friday Banking Freak-out: Deutsche Bank in the cross-hairs
Bond markets start to price the end of interest rate hikes
Stock markets are still trending higher in many cases…
Gold is playing its role of a safe haven

Podcast this week:

There are decades where nothing happens; and there are weeks where decades happen.

What is the fallout from this current banking stress?
Will there be a US recession?
What’s been happening in bond markets?
What about stock markets?
Is this banking stress over?
Why BNP Paribas is not changing its strategic views substantially.

Friday Banking Freak-out

Quite clearly, we are not anywhere near out of the woods with regards to banking stress, either in the US or in Europe.

Deposit outflows from US regional banks continues to be a big problem for the US banking sector, which numbers around 4000 banks in all (yes you may ask yourself the question: “why exactly do the Americans need so many banks?”)...

JPMorgan Chase & Co analysts estimate that the "most vulnerable" U.S. banks are likely to have lost a total of about $1 trillion in deposits since last year, with half of the outflows occurring in March following the collapse of Silicon Valley Bank.

Accelerating deposit outflows from US banks

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The basic problem remains this: with the advent of mobile banking, it is increasingly easy for households to switch their cash savings out of poorly-remunerated bank deposit accounts into money market mutual funds that yield up to 4.7% gross.

A huge gulf between money market yields and savings account interest rates

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The latest news flow is this: Small US commercial banks lost 2% deposit base over the week ending Mar 15 (SVB collapse Mar10). But there are some hints that the situation has stabilised since:

H4 release: Fed's emergency lending hadn't spread past NY, SF Fed districts

Fed commentary: Powell, Bostic say deposit flow stabilised

This pressure on banks has driven the main XLF financials ETF in the US back to recent lows,…

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colin1862

26th Mar '23

Thanks Edmund for informative article...'The stress on European banks is particularly evident in the price of European bank credit default swaps (CDSs)' - these instruments are quite illiquid so small buy/sells can exacerbate movements

Albm7

Thanks Edmund for all your weekly comments, much appreciated!

Alb

ryanc106

Great article Edmund

Edmund Shing

27th Mar '23

Very true Colin, but AT 1 bank bonds have also sold off heavily post the Credit Suisse wipeout, so clearly banks are under a lot of stress at present, even if rate hikes have not had the same economic effect on European banks as for their US counterparts.

One positive for the banks in Europe is that in general, bank clients are stickier and less prone to switch money out of low-yielding savings accounts into higher-yielding savings products - plus the interest rate spread to gain is not as wide as in the US.

Edmund

batt

28th Mar '23

Surely there is some advantage in having a lot of smaller banks as some of them can be allowed to fail. When they are too big to be allowed to fail like Lloyds and RBS the tax payer picks up the bill!

Thanks for your post

Market Musings 260323: No let-up in banking stress, yet