The Overnight Report: Volatility

This story features CHALICE MINING LIMITED, and other companies. For more info SHARE ANALYSIS: CHN

World Overnight
SPI Overnight	6974.00	– 132.00	– 1.86%
S&P ASX 200	7108.80	– 35.90	– 0.50%
S&P500	3855.76	– 5.83	– 0.15%
Nasdaq Comp	11188.84	+ 49.96	0.45%
DJIA	31819.14	– 90.50	– 0.28%
S&P500 VIX	26.52	+ 1.72	6.94%
US 10-year yield	3.52	– 0.18	– 4.87%
USD Index	103.67	– 0.97	– 0.93%
FTSE100	7548.63	– 199.72	– 2.58%
DAX30	14959.47	– 468.50	– 3.04%

By Greg Peel

And we’re back.

Apologies for being off air yesterday. Data centre issue beyond our control.

Recap

Last week Silicon Valley Bank announced it was looking to raise new capital. The news had exactly the opposite effect. Friday night brought a run on the bank, before the US regulator stepped in and closed the doors.

The Federal Deposit Insurance Corp guarantees deposits only up to US$250,000. Many a depositor with the bank – being tech companies and life sciences biotechs, venture capitalists and start-ups – have millions on deposit.

Treasury Secretary Janet Yellen has ruled out a bail-out a la 2008. The regulator is madly looking for another bank to buy out SVB in order to make the deposits safe and prevent a loss of confidence that leads to runs on other small banks. There are almost a thousand banks in the US.

New York-based crypto lender Signature Bank also went under.

As the ASX opened yesterday morning, the US Treasury, Fed and FDIC announced a new lending facility aimed at providing extra funding to eligible institutions to ensure that “banks have the ability to meet the needs of all their depositors”. The Fed said it was “prepared to address any liquidity pressures that may arise”. The Fed facility is part of a broader effort by the Treasury and the FDIC to avoid spillovers across the financial system and reassure customers that their money is safe following the second-largest bank failure in US history.

The so-called Bank Term Funding Program will offer loans of up to one year to lenders that pledge collateral including US Treasuries and other “qualifying assets”, which will be valued at par. The program will eliminate an institution’s “need to quickly sell those securities in times of stress” and would be enough to cover all uninsured US deposits, the Fed said. The facility is backstopped by the Treasury, which put up US$25bn.

Sound familiar?

Last year when the aggressive rates hikes were in swing there was already talk that the Fed will probably push it too hard until something breaks. Well, something has broken. The reason for SVB’s collapse can simply be traced to a sudden and extreme jump in the cost of debt after two decades of free money.

Given the bail-out is in effect contrary to the Fed’s rate hike policy, and QT, Goldman Sachs is one firm now predicting the Fed will not raise next week, despite 50 points being a possibility only days ago (and more so in light of another strong US jobs number on Friday night).

So, the good news is for now contagion in the banking system is contained, and the Fed may have to pause and reflect before something else breaks. Wall Street is lower again overnight, but only modestly. There are Australian tech companies exposed to SVB, but not to any great extent, and they are covered by the Fed’s move.

The bad news is our futures are down -132 points this morning.

Our Market

Our financials sector dropped -2.8% on Friday. The banks were not alone. Investors made the connection between the Silicon Valley tech sector and EVs, or batteries in general, it seems. Lithium miners were trashed. The top five index losers on the day were lithium stocks. The big miners were not immune, each falling -3%. Materials fell -3.1% and energy fell -3.4%, trading as if a global recession is now inevitable.

On Friday the ASX200 opened lower and tracked steadily down to the close. Yesterday the index opened down -70 points, was almost back to square mid-afternoon, and closed down -35.

The banks were again the big mover (-1.7%), but this time materials rallied 1.0% and energy 0.3%. Gold miners dominated the rally, taking out all top five spots on the index winners’ list, but the big miners rallied back as well. Oil prices had been higher overnight, but they were down last night.

Gold has rallied even further (US$).

The Aussie ten-year yield fell -13 points to 3.58% on Friday, but did not prevent losses across sectors. Yesterday the ten-year fell another -6 points to 3.52%, and the two-year fell -11 points to 3.24%. Yields in the US absolutely tanked last night.

All other sectors beyond resources closed down yesterday, mostly by over -1%, with telcos (-0.5%), industrials (-0.5%) and staples (-0.9%) slightly more defensive.

The falls came even as US futures had turned resoundingly positive on the news of the SVB bail-out.

Their Market

For the record, the US February jobs number came in hotter than hoped, but the pace of wage growth eased. It could have been a 50 point confirmation, but now seems irrelevant.

Also likely now irrelevant are this week’s February CPI and PPI data.

On Friday night the US ten-year yield fell -23 points to 3.70%. The two-year fell -32 points to 4.58%. Two days earlier it was above 5%. The US dollar gold price shot up and the US dollar index fell.

Last night the ten-year fell another -18 points to 3.52%, and the two-year fell…wait for it…-61 points to 3.98%. Yes, the same yield that was above 5% last week. The US dollar gold price shot up even further and the US dollar index fell even further.

Despite a solid bounce in the futures post to bail-out announcement, weakness in Europe last night had Wall Street opening lower. As soon as Europe closed, Wall Street rallied, with the Nasdaq leading the way.

The rally faded into the close.

The US yield curve has rapidly “de-inverted”. In just a couple of sessions, the two-ten inversion has gone from -110 points to -46 points. Given an inverted yield curve always precedes a recession (but does not always lead to one), a reversal of the inversion must be a good thing?

No. It’s actually what happens just before the recession.

The Fed funds futures market is now pricing in rate cuts from July. This is exactly what many were predicting last year during the Fed’s run of 75 point hikes. Having missed the boat to begin with, the Fed would then go too far.

Which is why, despite some such as Goldman Sachs now assuming a pause net week, consensus still has the Fed hiking, but only by 25. For to swing suddenly from “faster, higher, longer” and the prospect of a 50-pointer only a week ago, to a pause next week, would be to admit that yes, we got it wrong again.

Rather, the Fed can declare the SVB situation now under control, and the policy plan can continue as required.

First Republic Bank is another smaller US bank based in San Francisco which has similar exposures to SVB. It fell -61% last night – the largest of another night of routing of US reginal banks.

JP Morgan (Dow) fell -1.8%. Wells Fargo fell -7.1%.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1912.50	+ 44.40	2.38%
Silver (oz)	21.76	+ 1.23	5.99%
Copper (lb)	3.96	– 0.02	– 0.46%
Aluminium (lb)	1.13	– 0.00	– 0.04%
Lead (lb)	0.94	+ 0.01	0.63%
Nickel (lb)	10.31	+ 0.09	0.87%
Zinc (lb)	1.31	– 0.02	– 1.69%
West Texas Crude	74.45	– 2.23	– 2.91%
Brent Crude	80.43	– 2.35	– 2.84%
Iron Ore (t)	130.49	+ 1.05	0.81%

On Friday night metals prices fell slightly and the oils gained slightly. Gold jumped US$37/oz and the US dollar index fell -0.6%.

Last night we see metals prices again relatively stable but the oils down. Gold is up another US$44/oz and the dollar is down -0.9%.

The Aussie rose 0.3% on Friday night and 0.9% last night to US$0.6668.

The Week Ahead

(Given it was missed yesterday.)

The US CPI is due tonight and the PPI on Wednesday night.

Other US data due this week include industrial production, housing starts, consumer sentiment and the Empire State and Philly Fed indices.

China will report February retail sales, industrial production and fixed asset investment numbers.

New Zealand reveals its December quarter GDP.

The ECB will meet.

In Australia we’ll have the NAB business and Westpac consumer confidence surveys on Tuesday and the February jobs numbers on Thursday.

Thursday is also the expiry of March quarter ASX equity derivatives, which can lead to non-fundamental volatility (like we need some more).

The ex-div season rolls on, although the peak was passed this week. The biggest payers are now out of the way.

There’s a rush of junior miners reporting “earnings” this week, or at least performance/progress, including Chalice Mining ((CHN)), Liontown Resources ((LTR)), Lake Resources ((LKE)) and Sayona Mining ((SYA)).

Note that the US went on to summer time over the weekend. As of this morning the NYSE will close at 7am Sydney time, as will the SPI Overnight.

Today

The SPI Overnight closed down -132 points or -1.9%.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ING	Inghams Group	Downgrade to Hold from Accumulate	Ord Minnett
MYR	Myer	Downgrade to Lighten from Hold	Ord Minnett
NAN	Nanosonics	Downgrade to Lighten from Hold	Ord Minnett
QAN	Qantas Airways	Downgrade to Neutral from Buy	UBS
QBE	QBE Insurance	Downgrade to Lighten from Hold	Ord Minnett
TLC	Lottery Corp	Downgrade to Lighten from Hold	Ord Minnett
XRO	Xero	Downgrade to Sell from Lighten	Ord Minnett

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms