Authored by Simon White, Bloomberg macro strategist,

Investors are more comfortable holding duration, while option markets are pricing in greater left-hand tail-risks, suggesting a prevailing view of rising recession risk and inflation continuing to fall.

When inflation is persistent and elevated, avoiding securities with higher duration is prudent. Up until the end of last year, this is generally what the market was doing, with higher-duration sectors such as tech lagging and low-duration sectors like energy leading.

Since the beginning of this year, this trend has reversed. The only GICS Level 1 sectors that have outperformed the index in 2023 are the three with the highest duration. This does not suggest a market that is particularly fearful about entrenched inflation or price-growth that is about to flare up again.

At the same time, option markets in equities have been pricing in greater downside tail-risks. Far out-of-the-money put skew has risen recently. Also, call skew has fallen. This reflects a market more expectant of downside than upside price surprises, which would be consistent with rising recession risk.

If we are to get a recession, the maximum inversion of the 2s10s yield curve would be consistent with a 35% peak-to-trough fall in the S&P, i.e. another ~18% from here.

The market appears to be leaning towards a mild recession which is enough to put inflation back in its box. This is an optimistic view given the rise of underlying structural drivers in inflation, such as elevated profit margins.

As discussed previously, the Fed may also soon see inflation as less of a problem, and cut rates sooner than the market is expecting, as the economy and markets face further stress.

Ultimately, this would add further fuel to structurally persistent inflation, but in the meantime equities look set to keep pricing inflation as a fading problem.

Three large barges, one carrying 1,400 tons of methanol, were wedged against a dam and partially submerged, on the Ohio River in Louisville, Kentucky, following their detachment from a tugboat. 

The Louisville Metropolitan Emergency Services  said the navigation accident occurred early Tuesday morning when three barges — part of a group of ten — broke free from a tugboat after hitting a structure at the entrance to the Portland Canal near the river’s McAlpine Locks and Dam. 

Videos from Tuesday evening show the three barges pinned against the bridge

🚨#BREAKING: Multiple Emergency Response Teams has been Deployed to Address Submerged Barge Carrying 1,400 Tons of Toxic Methanol in the Ohio River

📌#Louisville | #Kentucky
⁰A major incident has taken place in the Ohio River near Louisville, Kentucky, requiring multiple… pic.twitter.com/swXQD8c5Zk

— R A W S A L E R T S (@rawsalerts) March 29, 2023

Louisville | Barge containing 1,400 tons of methanol, loose on the Ohio River
pic.twitter.com/tMf6YQMB1r

— Ｎｅｒｄｙ 🅰🅳🅳🅸🅲🆃 (@Nerdy_Addict) March 29, 2023

The barge carrying 1,400 tons of methanol is partially submerged at McAlpine Dam.

Emergency Response Team (ERT) at a barge incident on the Ohio River in Lville. 10 of 11 barges are loose from the tug. One carrying 1400 tons of methanol partially submerged at McAlpine Dam. Nearest water intake is in Henderson. @USCG @kyfishwildlife @ORSANCOchannel pic.twitter.com/qyWJZkTYGg

— Kentucky EEC (@KentuckyEEC) March 28, 2023

Coast Guard spokesperson Chris Davis told NBC News that state and federal agencies are trying to remove barges. Downriver traffic has been halted. 

“We had shut down traffic.

 “There’s going to be salvage operations, and it’s going to be dangerous,” Davis said.

As of now, Louisville Water Co. has reported the incident has not triggered an environmental disaster, and the city’s drinking water remains unaffected.

“Your water is safe to drink,” the water agency said in a Facebook post.

The Centers for Disease Control and Prevention states that methanol is highly toxic to both humans and wildlife. This chemical, classified under the category of “toxic alcohols,” is commonly found in antifreeze, carburetor cleaner, and windshield washer fluids.

… and this incident comes on the heels of the toxic water release from the train derailment in East Palestine, which flowed down the Ohio River, prompting water agencies to take preventive measures to safeguard drinking water for millions of people. 

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic and review the charts.

The second largest U.S. bank failure and the deeply discounted emergency sale of Credit Suisse have investors betting the Federal Reserve will pivot. They don’t seem to care that inflation is running hot and sticky, and the Fed remains determined to keep rates “higher for longer” despite the evolving crisis.

Like Pavlov’s dogs, investors buy when they hear the pivot bell ringing. Their conditioning may prove harmful if the past proves prescient.

The Bearish History of Rate Cuts

Since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%.

The three most recent episodes saw larger-than-average drawdowns. Of the six other experiences, only one, 1974-1977, saw a drawdown worse than the average.  

So why are the most recent drawdowns worse than those before 1990? Before 1990, the Fed was more active. As such, they didn’t allow rates to get too far above or below the economy’s natural rate. Indeed, high inflation during the 1970s and early 1980s forced Fed vigilance. Regardless of the reason, higher interest rates helped keep speculative bubbles in check.

During the last 20 years, the Fed has presided over a low-interest rate environment. The graph below shows that real yields, yields less inflation expectations, have been trending lower for 40 years. From the pandemic until the Fed started raising rates in March 2022, the 10-year real yield was often negative.

Speculation often blossoms when interest rates are predictably low. As we are learning, such speculative behavior emanating from Fed policy in 2020 and 2021 led to conservative bankers and aggressive hedge funds taking outsized risks. While not coming to their side, what was their alternative? Accepting a negative real return is not good for profits.

We take a quick detour to appreciate how the level of interest rates drives speculation.

Wicksell’s Elegant Model

A few years ago, we shared the logic of famed Swedish economist Knut Wicksell. The nineteenth-century economist’s model states two interest rates help assess economic activity. Per Wicksell’s Elegant Model:

First, there is the “natural rate,” which reflects the structural growth rate of the economy (which is also reflective of the growth rate of corporate earnings). The natural rate is the combined growth of the working-age population and productivity growth. Second, Wicksell holds that there is the “market rate” or the cost of money in the economy as determined by supply and demand.

Wicksell viewed the divergences between the natural and market rates as the mechanism by which the economic cycle is determined. If a divergence between the natural and market rates is abnormally sustained, it causes a severe misallocation of capital.

The bottom line:

Per Wicksell, optimal policy should aim at keeping the natural and market rate as closely aligned as possible to prevent misallocation. But when short-term market rates are below the natural rate, intelligent investors respond appropriately. They borrow heavily at the low rate and buy existing assets with somewhat predictable returns and shorter time horizons. Financial assets skyrocket in value while long-term, cash-flow-driven investments with riskier prospects languish.

The second half of 2020 and 2021 provide evidence of Wicksell’s theory. Despite brisk economic activity and rising inflation, the Fed kept interest rates at zero and added more to its balance sheet (QE) than during the Financial Crisis. The speculation resulting from keeping rates well below the natural rate was palpable.

What Percentage Drawdown Should We Expect This Time?

Since the market experienced a decent drawdown during the rate hike cycle starting in March 2022, might a good chunk of the rate drawdown associated with a rate cut have already occurred?

The graph below shows the maximum drawdown from the beginning of rate hiking cycles. The average drawdown during rate hiking cycles is 11.50%. The S&P 500 experienced a nearly 25% drawdown during the current cycle.

There are two other considerations in formulating expectations for what the next Federal Reserve pivot has in store for stocks.

First, the graph below shows the maximum drawdowns during rate-cutting periods and the one-year returns following the final rate cut. From May 2020 to May 2021, the one-year period following the last rate cut, the S&P 500 rose over 50%. Such is three times the 16% average of the prior eight episodes. Therefore, it’s not surprising the maximum drawdown during the current rate hike cycle was larger than average.

Second, valuations help explain why recent drawdowns during Federal Reserve pivots are worse than those before the dot-com bubble crash. The graph below shows the last three rate cuts started when CAPE10 valuations were above the historical average. The prior instances all occurred at below-average valuations.

The current CAPE valuation is not as extended as in late 2021 but is about 50% above average. While the market has already corrected some, the valuation may still return to average or below it, as it did in 2003 and 2009.

It’s tough to draw conclusions about the 2020 drawdown. Unprecedented fiscal and monetary policies played a prominent role in boosting animal spirits and elevating stocks. Given inflation and political discord, we don’t think Fed members or politicians will be likely to gun the fiscal and monetary engines in the event of a more significant market decline.

Summary

The Federal Reserve is outspoken about its desire to get inflation to its 2% target. If they were to pivot by as much and as soon as the market predicts, something has broken. Currently, it would take a severe negative turn to the banking crisis or a rapidly deteriorating economy to justify a pivot, the likes of which markets imply. Mind you, something breaking, be it a crisis or recession, does not bode well for corporate earnings and stock prices.

There is one more point worth considering regarding a Federal Reserve pivot. If the Fed cuts Fed Funds, the yield curve will likely un-invert and return to a normal positive slope. Historically yield curve inversions, as we have, are only recession warnings. The un-inversion of yield curves has traditionally signaled that a recession is imminent. 

The graph below shows two well-followed Treasury yield curves. The steepening of both curves, shown in all four cases and other instances before 1990, accompanied a recession.

Over the past two weeks, the two-year- ten-year UST yield curve has steepened by 60 bps!

US futures extended gains for a second day on Wednesday as banking sector fears continued to ease, while Nasdaq futs got a boost from a rally in Asian tech stocks following the announced split of Chinese internet giant Alibaba which sent the Hang Seng up 2.1% and HSTECH +2.5%. 

S&P 500 and Nasdaq 100 futures contracts were up 0.8% as of 7:30 a.m. in New York, trading at 4,034 and 12832 respectively.

The S&P 500 is set for a flat month, while the Nasdaq 100 has surged nearly 5% in March and more than 15% in Q1 – its best quarter in nearly three years and its first rise in 5 quarters – as tech stocks, especially megacaps, found renewed favor with investors.

Bond yields are lower following dovish comments by ECB’s Philip Lane on inflation which supported bunds over London session, and helping drive declines for front-end Treasury yields. The USD stronger, and commodities are flattish. WTI is up small, approaching the bottom-end of the recent $75 – $80 YTD range. Overnight, the WaPo reported that the government may move to strengthen capital/liquidity requirements for banks with assets larger than $100bn. Fed’s Bullard said that banking crisis can be contained with policy rather than by moves in interest rates; will the bond market remove any rate cut expectations? Doubtful.

In premarket trading, Alibaba Group ADRs fell in US premarket trading after surging Tuesday on plans to split. Its Hong Kong-listed shares were 12% higher, tracking overnight gains on Wall Street. That sparked a rally in Chinese tech shares as investors piled into the companies that were stung by a crackdown from Beijing over the past two years. UBS shares climbed as much as 3% after the Swiss lender said veteran UBS CEO Sergio Ermotti will return and replace Ralph Hamers as chief executive officer; Jefferies shares were little changed after the financial services firm’s profit plunged in its fiscal first quarter, as a bump in equities and fixed income trading failed to offset a slump in investment banking. Here are some other notable premarket movers:

• Lululemon shares leap 15% in premarket trading after the athletic-apparel brand reported fourth-quarter adjusted earnings per share that beat analyst estimates and issued guidance that topped expectations. Analysts found the results to be strong overall, with most expecting the negative sentiment around the stock to be alleviated with the performance.
• Micron rises 2.7% after the largest US maker of memory chips issued a forecast of adjusted revenue for the third quarter that was better than some had feared. Analysts were still cautious about the tough environment facing chipmakers, but see signs that the worst of the downturn may be behind the industry.
• Shares of semiconductor companies are rising following Micron’s forecast and after Infineon raised its revenue outlook. Qualcomm gains 1%, Advanced Micro Devices (AMD US) +0.9%, Nvidia +0.8% and Intel +0.8%.
• Alibaba and other US-listed Chinese internet stocks are poised for a pullback, after their shares surged on Tuesday following Alibaba’s plan to split into six units and seek separate listings. Alibaba slides 1.4% in premarket trading, Baidu -0.8%, JD.com -1.5%.
• Cryptocurrency- related stocks rally as Bitcoin extends gains into a second day to breach the $28,000 level. Cipher Mining rises 15%, Riot Platforms +7.4%, Marathon Digital +6.3%, Coinbase +4%, MicroStrategy +3.9%.
• Arcturus Therapeutics shares jump 25% after the biotech beat analysts’ earnings estimates for the fourth quarter and repaid debts that allow its “cash runway” to extend to 2026. Analysts were especially positive on the company’s update regarding its pipeline and its potential.
• Lucid rose 1.9% after the electric vehicle-maker said it would cut 18% of its workforce, including employees and contractors. Morgan Stanley notes that fellow EV startups may need to consider similar cost cutting measures given increased competition and a challenging capital-raising environment.

US equities have traded in a narrow range over the past week, as investors digested the banking sector crisis, with contagion fears easing, while the Fed hinted that the rate-hiking cycle was near the end, but not ready for a pivot yet as inflation was still too high. Swaps traders currently price in more than a 50% probability the Fed will raise rates by a quarter point at its next meeting, with plans to ease thereafter, something with which several strategists, including those at BlackRock, disagree.

The bad news for markets “is that the Fed is very unlikely to cut rates until Q2 2024, unless US growth slows more markedly than we anticipate, leaving us with a ‘higher for longer’ scenario,” Willem Sels, global chief investment officer at HSBC Private Banking and Wealth, wrote in a note on the outlook for the next quarter. “Another key consideration for investors should be China’s reopening and the bounce in consumer activity, which markets are still completely underestimating,” he added, saying China’s renewed focus on growth will help reduce the risk of a recession in the rest of the world.

“We associate the current market pricing in terms of rate cuts not to be appropriate, we are not expecting any rate cuts in 2023 across different economies, especially in the US,” Giulio Renzi Ricci, investment strategist at Vanguard Asset Services, said on Bloomberg Television. “For that reason we don’t expect growth stocks, and tech in particular, still will need to be discounted back” once the market realizes a pause in rate cuts isn’t really happening.

At the same time, investors argue that the odds of a recession have risen after banking turmoil earlier this month sparked fears of wider contagion, and will lead to sharply tighter lending conditions. An index of dollar strength was steady after ending Tuesday near the lowest level in eight weeks. “The banking crisis and the new tighter standards for banks is equivalent to one to two rate hikes,” said Eva Ados, chief investment strategist for ERShares, in an interview with Bloomberg Television. “There is a big possibility here of a pricing mistake. We are pricing in the rate drop rather than the reason why rates are dropping, which is the banking crisis.”

Meanwhile, top US financial officials on Tuesday outlined what’s likely to be the biggest regulatory overhaul of the banking sector in years, addressing underlying issues that contributed to the collapse of Silicon Valley Bank and other US regional lenders.

There is a sea of green across the equity space with European stocks following their Asian counterparts higher and futures pointing to a positive open on Wall Street. Alibaba led the rally in Hong Kong after announcing plans to split into six business units, while tech stocks are also outperforming in Europe after upbeat forecasts from Micron and Infineon. here are the biggest European movers:

• UBS shares climb as much as 3% after the Swiss lender said Sergio Ermotti will replace Ralph Hamers as chief executive officer
• Coloplast rises as much as 2.6% after being upgraded to equal-weight at Barclays with the broker saying the ostomy products maker’s estimates now look more achievable
• Infineon jumps as much as 7.9%, the biggest intraday advance since Feb. 2, after the chipmaker lifted revenue and margin estimates for the second quarter
• Strix rises as much as 9.8%, the most in more than two months, after the kettle safety-control producer said in its full-year earnings report there are “green shoots” appearing
• OCI gains as much as 13%, the most intraday since April 2020, after activist investor Jeff Ubben’s Inclusive Capital Partners urged the fertilizer maker to explore strategic options
• WPP advances as much as 2.6% after Exane BNP upgraded to outperform from neutral, turning more positive on the ad agency sector
• Next shares fall as much as 9.1%, with analysts viewing the clothing retailer’s maintained sales and profit guidance for 2024 as disappointing
• Mercedes-Benz Group drops as much as 2.8% after Kuwait Investment Authority placed 20 million shares at a ~3.6% discount to the last close
• Aroundtown falls as much as 12%, hitting another record low after Tuesday’s 10% drop, as in-line results and a dividend suspension did little to reassure traders
• Atos drops as much as 11% after a report from BFM said Airbus wanted to renegotiate the price of Evidian, a unit of the embattled French digital services firm
• Encavis sinks as much as 12%, the most intraday since January, as Jefferies notes the decision to waive its dividend to fund future growth marks a turning point

Asian stocks advanced as Chinese tech shares rallied on optimism Alibaba’s overhaul will pave the way for other tech giants to potentially unlock billions of dollars in shareholder value. The MSCI Asia Pacific Index rose as much as 0.8%, led by Hong Kong. Chinese technology stocks climbed 2.5% to a five-week high. Alibaba jumped 12%, while its biggest shareholder Softbank Group gained more than 6%. Alibaba surprised markets after the internet behemoth announced plans to split its $220 billion empire into six units that will individually raise funds and explore initial public offerings. The plan is positive for the sector and could signal further easing of regulatory constraints, according to analysts.

“The government needs to boost the economy this year, and the big tech platforms, which have been under pressure over the last couple of years and shedding staff, are key to help the government boost employment,” Vey-Sern Ling, managing director at Union Bancaire Privee, told Bloomberg TV.  Elsewhere, Japanese stocks gained as easing concerns over the banking sector revived risk appetite following weeks of volatility. Shares in mainland China and South Korea eked out small gains as investors braced for a slew of data on the US economy this week

Japanese stocks rose as a revamp plan at Alibaba boosted SoftBank. Gains accelerated in the afternoon ahead of Thursday’s ex-dividend date for some 1,500 stocks. The Topix rose 1.5% to close at 1,995.48, while the Nikkei advanced 1.3% to 27,883.78.  SoftBank Group surged 6.2%, the biggest boost to the Nikkei 225, after China’s Alibaba Group announced a six-way split of its businesses. The news fueled optimism for a recovery at one of the Japanese company’s most important holdings. Toyota contributed the most to the Topix gain, increasing 2.6%. Out of 2,159 stocks in the index, 2,013 rose and 101 fell, while 45 were unchanged. “Globally excessive concerns about the financial system have receded, and there is no new additional bad news,” said Shogo Maekawa, global market strategist at JPMorgan Asset Management Japan. “Domestically, the market was supported by buying for year-end dividends and dividend reinvestment.

Australian stocks also rose: the S&P/ASX 200 index gained 0.2% to close at 7,050.30, after Australian inflation decelerated more than expected in February, bolstering the case for the Reserve Bank to stand pat at next week’s policy meeting. Materials and energy stocks were the biggest gainers on the benchmark.  Read: Australian Inflation Eases, Bolstering Case for Rate Pause “Markets were already quite convinced with the story of an April pause, given what’s happening globally. But this just adds to the story,” said Jessica Ren, a strategist at Westpac Banking Corp. in Sydney. Recent comments from RBA policymakers had been implying “get ready for a pause.” In New Zealand, the S&P/NZX 50 index fell 0.3% to 11,736.75

Finally, Indian stocks also ended higher on Wednesday with small-cap stocks registering their best performance in two months. Adani group stocks rebounded from the steep losses seen on Tuesday as company officials rebutted media reports that raised concerns about the group’s ability to repay debt. Flagship Adani Enterprises rallied 8.7%, while Adani Ports rose 7.3%. A late spurt in buying led by traders covering short positions ahead of monthly derivatives expiry saw India outperform most equity gauges in Asia. The S&P BSE Sensex rose 0.6% to 57,960.09 in Mumbai, while the NSE Nifty 50 Index advanced 0.8% to 17,080.70. The latter saw its best one-day gain since March 3. A gauge of small-cap stocks climbed 1.7% to mark its best day since January 31. “There was some short covering in the market toward the end of the session but it was not a sharp move,” Gaurav Bissa, vice president at InCred Capital. “That said, we are recommending clients to turn bullish on the Nifty as we see a bounceback in the near-term.”  Hindustan Unilever contributed the most to the Sensex’s gains, increasing 1.9%. Out of 30 shares in the Sensex index, 26 rose while 4 stocks fell.

In FX, the dollar rose nearly 1% versus the yen to 132.09, its highest since March 22; the Bloomberg Dollar Spot Index edged up 0.1%. The US currency also benefited from Japanese financial year-end flows, which weighed on the yen in Asian trade. The Australian and New Zealand dollars struggled, while the euro and the pound were little changed against the US currency.

In rates, treasuries rose after a two-day selloff and erased a portion of the curve-flattening selloff of past two days as investors awaited remarks from Federal Reserve officials and economic releases this week for clues on monetary policy. In particular focus will be data on the central bank’s preferred inflation measure – the core PCE deflator – which is likely to factor into the Fed’s next policy decision. Dovish comments by ECB’s Philip Lane on inflation supported bunds over London session, helping drive declines for front-end Treasury yields. US yields, off session lows, remain richer by ~4bp on the day across front-end of the curve with inverted 2s10s spread steeper by ~2bp; 10-year around 3.55% is richer by ~2bp on the day with bunds lagging by 2.5bp in the sector. The US auction cycle concludes with $35BN 7-year note sale at 1pm, follows Tuesday’s decent 5-year note sale which stopped 1bp through the WI; WI 7-year yield around 3.590% is ~47bp richer than February’s result.

In commodities, crude futures advance with WTI rising 0.7% to trade near $73.70. Spot gold falls 0.4% to around $1,966. Bitcoin gains 4.1%.

Now to the day ahead. In terms of data releases, we have the US February pending home sales, in the UK February net consumer credit, mortgage approvals and M4, in Germany the April GfK consumer confidence and lastly in France March consumer confidence data. Finally, we will hear from ECB’s Kazimir as well the BoE’s Mann.

Market Snapshot

• S&P 500 futures up 0.9% to 4,036.50
• STOXX Europe 600 up 0.8% to 448.02
• MXAP up 0.6% to 160.78
• MXAPJ up 0.7% to 517.13
• Nikkei up 1.3% to 27,883.78
• Topix up 1.5% to 1,995.48
• Hang Seng Index up 2.1% to 20,192.40
• Shanghai Composite down 0.2% to 3,240.06
• Sensex up 0.4% to 57,866.24
• Australia S&P/ASX 200 up 0.2% to 7,050.33
• Kospi up 0.4% to 2,443.92
• German 10Y yield little changed at 2.32%
• Euro down 0.1% to $1.0832
• Brent Futures up 0.3% to $78.87/bbl
• Gold spot down 0.6% to $1,962.15
• U.S. Dollar Index up 0.24% to 102.68

Top Overnight News from Bloomberg

• China warned the US and Taiwan President Tsai Ing-wen that any meeting with House Speaker Kevin McCarthy would be a serious provocation, raising the stakes for her trip to the US. Tsai left Taipei on Wednesday bound for New York on a plane that was guarded by F-16 fighters as it headed over the Pacific. She’ll later visit two Central American allies, and on the way home she’s planning to stop in Los Angeles, where she’s expected to meet with McCarthy. BBG
• The BOJ’s Shinichi Uchida indicated that any yield curve control adjustment wouldn’t be communicated ahead of time. That’ll keep the market on its toes, with some concluding it’s the only way to avoid a bond selloff in advance. It comes as bets on policy normalization help the yen make a comeback as a haven. BBG
• UBS said Sergio Ermotti will return as chief executive, as the Swiss giant moves into a new era with its takeover of Credit Suisse. Mr. Ermotti has been credited with repositioning the bank and focusing it on less risky businesses after UBS suffered big losses during the financial crisis. WSJ
• UK mortgage approvals edged up in February but remained more than a third below their levels from a year ago as high borrowing costs squeezed household spending, the BOE has said. Lenders last month approved a total of 43,500 mortgages for house purchases, from 39,600 in January, the BoE said on Wednesday. Approvals in February 2022 came to 69,131. The figure was above analysts’ forecast of 42,000, and marked the first monthly increase since August 2022. FT
• The UK competition regulator has launched an in-depth probe into US chipmaker Broadcom’s $69bn takeover of cloud software company VMware, after warning it could make computer servers more expensive. FT
• More bullish oil momentum. US crude stockpiles slumped by 6.1 million barrels last week, API data is said to have shown, in what would be the biggest drop this year if confirmed by the EIA. Gasoline supplies also sank. In the Middle East, one of the top producers in Iraq’s Kurdistan region started cutting production as a spat that has halted 400,000 barrels a day of exports drags on. BBG
• Jamie Dimon will be questioned in a civil lawsuit over JPMorgan Chase’s relationship with Jeffrey Epstein, people familiar with the matter said. The U.S. Virgin Islands sued JPMorgan last year, saying the bank facilitated Epstein’s alleged sex trafficking and abuse. WSJ
• Top officials from the Federal Reserve and Federal Deposit Insurance Corporation will testify to the House Financial Services Committee on the collapse of Silicon Valley Bank and Signature Bank, a day after Tim Scott, a Republican senator, accused SVB of being “rife with mismanagement”. FT
• Tesla’s move to slash prices in China has backfired as Elon Musk’s company loses market share to Warren Buffett-backed BYD, putting Chinese carmakers on track to sell more passenger vehicles than their foreign rivals for the first time in 2023. FT
• The European Central Bank will need to increase interest rates further if recent stress in the financial system stays contained, Chief Economist Philip Lane told Zeit in an interview: BBG
• The yen is making a comeback as a preferred foreign- exchange haven, after banking crises in the US and Switzerland hurt the dollar and franc’s standing as go-to assets for turbulent times: BBG
• Traders are leaning toward further gains in the world’s biggest bond market, after a rally that got a major boost from short-covering by hedge funds this month: BBG
• President Joe Biden responded to House Speaker Kevin McCarthy’s demands that he begin negotiations over the debt ceiling by challenging Republicans to produce a public budget plan before departing Thursday for a two-week Easter recess” BBG

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive albeit with most major indices rangebound amid a lack of fresh macro drivers and heading into quarter-end, while Hong Kong markets outperformed as tech stocks surged on Alibaba’s plan for a six-way split. ASX 200 was kept afloat by strength in the commodity-related sectors and after softer-than-expected CPI data supported the case for the RBA to pause at next week’s meeting, although gains were limited by weakness in the top-weighted financial industry. Nikkei 225 traded higher after Japan’s parliament passed a record JPY 114tln budget for FY23 and with policymakers said to consider lowering mortgage rates for families with children, while BoJ officials also stuck to the dovish script. Hang Seng and Shanghai Comp. were varied with Alibaba front-running the advances in Hong Kong as its plan for a split is seen to unlock value for shareholders and has spurred some speculation that its large tech peers could follow suit, while the mainland lagged despite the PBoC’s liquidity injection as frictions lingered regarding Taiwan President Tsai’s planned transit through the US and after the Biden administration added five Chinese companies to the entity list for allegedly aiding China’s repression of Uyghurs.

Top Asian News

• China NDRC Deputy Director General said China’s potential growth rate is the potential growth rate of the whole world and said they are optimistic for the growth situation for this year, according to Reuters.
• US President Biden’s administration added five Chinese Co.s to the entity list for allegedly aiding China’s repression of Uyghurs.
• Taiwan’s President Tsai comments before boarding a flight to New York in which she noted Democratic Taiwan defends democratic values and external pressure does not affect their determination to go out into the world, according to Reuters.
• China’s Taiwan Affairs Office urged the US not to arrange a transit of Taiwan’s leader through the US and said any meeting between Taiwan President Tsai and US House Speaker McCarthy would be a severe provocation, while it added that China firmly opposes this and will definitely take measures to fight back, according to Reuters.
• US senior administration official said Taiwan President Tsai’s planned transit is consistent with a long-standing US practice and the US sees no reason for Beijing to overreact to the transit which is consistent with the unofficial relationship and the One-China policy. The official added that every Taiwan president has transited through the US and President Tsai has met with members of Congress in all her previous six transits, as well as stated that China’s attempts to alter Taiwan’s status quo will not pressure the US to alter its practice of facilitating transits by Taiwan’s presidents, according to Reuters.
• BoJ Deputy Governor Uchida said they will make a judgement on trend inflation by looking at various indicators, while he noted the BoJ would face an unrealised loss of JPY 50tln on its balance sheet if the 10yr bond yield rises to 2%, according to Reuters.

European bourses are firmer across the board, Euro Stoxx 50 +1.2%, as banking concerns continue to dissipate and focus turns to the sessions speakers. Sectors feature marked outperformance in Tech names after updates from Infineon and Micron; MU +2.5% pre-market. Stateside, futures are in the green, ES +0.9%, paring the downside from Tuesday which was a feature of underperformance in large-cap names; ahead, the US-specific docket is relatively light. Infineon raised Q2 revenue and segment margin guidance alongside lifting FY revenue guidance, primarily due to resilient business dynamics in its core automotive and industrial segments. Micron: Q2 adj. EPS -1.91 (exp. -0.86); it made inventory write-downs of USD 1.43bln in the quarter, which had an impact of USD 1.34/shr. Q2 revenue USD 3.69bln (exp. 3.702bln). Expects profitability to remain extremely challenged in the near-term and said profitability levels in the industry are currently not sustainable.

Top European News

• EU’s Dombrovskis said the situation in the EU banking sector is stable and banks are prepared to withstand shocks.
• ECB’s Lane says to ensure that inflation falls to 2%, further interest rate hikes are required under the scenario expected by the ECB, according to Die Zeit; rates must increase if banking tensions have no or a “fairly limited” impact, bank sector tensions are seen as settling down and there is no reason to expects major problems.
• ECB’s Kazimir agreed not to give guidance on the May ECB meeting, Kazimir thinks inflation is too high for too long; ECB should continue increasing rates, possibly at a slower pace; will take into account financial market situation.
• BoE FPC Minutes: All UK banks are resilient to risks from rising interest rates, including from bond positions; maintains countercyclical capital buffer rate at 2%; UK firms are resilient from higher debt costs.

FX

• The DXY is erring lower and has dipped below the 102.50 mark within 102.41-102.75 boundaries despite marked AUD & JPY pressure.
• Pressure which stems from cooler-than-expected inflation and a myriad of factors sparking a pullback from recent peaks respectively; AUD/USD at 0.6662 low and USD/JPY above 132.00.
• In contrast, the DXY remains softer given the resilience of the EUR and GBP with ECB’s Lane and BoE data respectively perhaps assisting with EUR/USD above 1.0850 though Cable is yet to breach 1.2350 convincingly.
• CAD fails to derive any lasting support from oil benchmarks and as such is struggling to retain the 1.36 handle while the SEK is impaired by softer retail data despite favourable sentiment indicators.
• Swedish NIER expects the Riksbank to continue on its set path re. rate increases, with the cycle deemed to be over in July when the rate will be 3.75%.
• PBoC set USD/CNY mid-point at 6.8771vs exp. 6.8780 (prev. 6.8749)

Fixed Income

• Debt futures rebound relatively firmly to defy month end rebalancing flows tilted towards stocks over bonds.
• Bunds reclaim more than half of Tuesday’s losses within a 135.47-136.28 range, Gilts towards the top of 104.18-103.56 parameters and T-note nearer 114-28 than 114-14+ ahead of US housing data, House hearing on bank failures and USD 35bln 7-year auction.
• Greece has commenced the sale of a new 5yr bond with price guidance at circa 95bps over mid-swaps, according to Reuters sources.

Commodities

• WTI and Brent are firmer but reside in relatively narrow sub-USD 1/bbl parameters which specifics light aside from weekly inventory data yesterday and ahead alongside ongoing focus re. Iraqi flows through Turkey.
• Specifically, WTI trades around USD 74/bbl (in a 73.51-74.00/bbl range) while its Brent counterpart trades on either side of USD 79/bbl (in a 78.73-79.32/bbl parameter).
• Spot gold remains softer and in Tuesday’s parameters while base metals are generally softer despite the tone but again in narrow ranges, with the exception of iron ore which is bolstered on steel consumption expectations.
• US Private Energy Inventory (bbls): Crude -6.1mln (exp. +0.1mln), Cushing -2.4mln, Distillate +0.5mln (exp. -1.5mln), Gasoline -5.9mln (exp. -1.6mln).
• US Energy Secretary Granholm said Strategic Petroleum Reserve buybacks could begin late this year and that work on two of four oil reserve sites are to go ‘into the fall’ which has delayed the buybacks, according to Reuters.
• Russian Gazprom says “We are approaching the limit of gas supplies to China”, via Sky News Arabia.
• Cargill informed the Russian Agriculture Ministry that it will stop the export of Russian grain from the next exporting season (July), according to the Russian ministry which adds it will not affect the volume of domestic grain shipments abroad.

Geopolitics

• Ukrainian military officials said Russian forces remain relentless in their attempts to take full control of Bakhmut and Avdiivka in eastern Ukraine but were not making progress, according to Reuters.
• Ukrainian President Zelensky extended an invitation to Chinese President Xi to visit Ukraine, according to AP; Kremlin says it is not up to Russia to advise China’s leader when to visit Ukraine, adds that Russia’s wider war with hostile states will last for a long time
• US President Biden responded that he hasn’t seen that but is concerned when asked if he was concerned about Russia sending tactical nuclear weapons to Belarus, according to Reuters.
• Russia has started drills with Yars Intercontinental Ballistic Missiles, according to its Defence Ministry

US Event Calendar

• 07:00: March MBA Mortgage Applications 2.9%, prior 3.0%
• 10:00: Feb. Pending Home Sales YoY, prior -22.4%
• 10:00: Feb. Pending Home Sales (MoM), est. -3.0%, prior 8.1%

Central Banks

• 08:05: NY Fed Head of Supervision Dianne Dobbeck Speaks to Bankers
• 10:00: Fed’s Barr Appears Before the House Financial Services Panel

DB’s Jim Reid concludes the overnight wrap

Two days of relative calm has helped encourage a quieter week and encourages me that I can go on holiday after tomorrow without too much disturbances. If anything spectacular happens for an hour this afternoon I’ll be oblivious to it as I’m having another back injection under general anaesthetic as the sciatica is flaring up again. So my recent operation hasn’t helped. I went for a nerve conduction test last Friday and I have 4 trapped nerves. 2 in my leg and 2 in my neck/arm. I can’t ask for too much sympathy as its all golf and weight training related. If I accepted that I wasn’t 25 anymore I suspect I’d be in decent shape. However I still have an ambition to get down to become a scratch golfer and without exciting goals and targets life is a duller affair. Anyway, I’ll be doing the EMR tomorrow before heading off skiing, where I’ll also be trying to protect my knees. So we’ll save our emotional goodbyes for two weeks until tomorrow.

Anyway the relative calm continues to be most felt in bond market repricing, 2yr USTs rose +13.4bps yesterday (unchanged in Asia). They are around +50bps above where they were last Friday lunchtime but still down about -100bps from where they were on March 9th, around Powell’s testimonies. Improving sentiment was also evident in the fed futures market which further trimmed expectations of rate cuts. Fed futures are pricing in -70bps of rate cuts to year-end, with the implied rate for the Fed’s December meeting rising +11.2bps yesterday to 4.318%. This is up from 3.57% at the lows on Friday. So a big but steady and fairly quiet move over the last 48-72 business hours.

Longer-dated Treasury yields were more subdued yesterday, with 10yr yields just +3.9bps higher at 3.564%. This is the second smallest move in either direction since the SVB news broke. European sovereign debt yields also rose as the banking sector further stabilised and regional economic survey data improved (more on that below). 10yr bund yields were +6.3bps higher at 2.29%, while the more policy sensitive 2yr rate was +7.1bps higher to 2.59%. Other sovereign 10yr European yields rose more than German yields, with Gilts (+9.0bps), BTPs (+7.4bps), and OATs (+6.5bps) all higher.

In equities, the S&P 500 fell back -0.16%. On a sector-by-sector level there was a significant amount of dispersion, as energy (+1.45%) and other cyclicals such as transports (+0.78%) and capital goods (+0.55%) outperformed but media (-1.10 %) and healthcare equipment (-1.04%) fell back. The tech-heavy NASDAQ traded down -0.45%.

Briefly looking at the US regional banking sector, the FDIC’s Gruenberg stated yesterday that regional bank liquidity has remained stable. Against this backdrop, the regional banks KBW index traded up +0.32% with most of the smaller regional banks gaining on the day, while a couple of heavier weighted banks (BofA -1.3% & Wells Fargo -0.8%) were a drag on the KBW index. The embattled First Republic also finished -2.32% lower.

European equity markets traded flat, with the STOXX 600 down -0.06%. We heard the ECB’s Enria emphasise that bank oversight needs to be more efficient in Europe, and that changes to supervision should reduce the burden on banks. In particular, Enria stated that a closer look at the European CDS market is in order, calling for an improvement in the degree of information available on the market, as opposed to implementing prohibitions or new rules. He also spoke on the recent banking turmoil, stating that the “direct exposure to Credit Suisse is relevant but manageable”, but that he was “concerned by nervousness among investors on banks”.

This morning in Asia, equity markets are seeing decent gains. The Hang Seng (+1.80%) is outperforming amid a rally in Chinese technology shares on Alibaba’s reorganisation news that will see the company split into six independent business groups seeking separate IPOs. Their shares are up around +13%. This rally bolstered other Asian equities with the Nikkei (+0.46%) and the CSI (+0.24%) edging higher while the Shanghai Composite (-0.04%) is just above flat. Elsewhere, the KOSPI (-0.16%) is losing ground after opening slightly higher in early trade. In overnight trading, US stock futures are indicating a positive start with contracts tied to the S&P 500 (+0.39%) and NASDAQ 100 (+0.30%) both higher.

Moving on, Australia’s CPI slowed to an eight-month low of +6.8% y/y in February (v/s +7.2% expected), down from the prior month’s +7.4% annual increase. This was down to a smaller rise in housing and fuel costs. This will further support the pause narrative at next month’s RBA meeting.

In terms of yesterday’s data, the US March Conference Board consumer confidence index results came in firmly above expectations at 104.2 (vs 101 expected and 103.4 last month) as confidence in future business and labour market conditions rose. Looking into the details, the expectations index, the short-term outlook for income, business and labour market conditions, rose to 73 from 69.7 in February, however, the present situation index, which reflects consumer assessment of current business and labour market conditions, fell from 152.8 to 151. The survey was for the 4 week period up to March 20, which puts just about half the response time after SVB first showed signs of stress and only really covered the first few days of the CS news flow.

In the same vein, the Richmond business conditions index came in at -17, down from -6 last month, its lowest level since October, as broader business conditions deteriorated over the month following the banking sector jitters. The manufacturing index did post above expectations at -5 (vs -10 expected), a firm rise from -16 in February. Putting the improvement in manufacturing aside momentarily, adding further to the picture of weakening business conditions was the March Dallas Fed services activity index that fell to -18 down from -9.3 in its largest drop since December. The Richmond survey period went from March 1 to March 25 and the Dallas survey went from March 14-22. Of the three US surveys to release data yesterday, only the Dallas survey was completed entirely after SVB and Signature failed and perhaps that is why it was the most negative, however they were all measuring slightly different metrics. This trend bears watching as we get the final University of Michigan data on Friday, which could show an interesting change from the preliminary results.

We additionally had two key national data releases in France and Italy. In France, the business confidence index came out in line with expectations at 103, whilst the manufacturing confidence slightly beat forecasts to hit 104 (vs 103 expected). The overall index came down one point to 103, but this remains above the long-term average of 100. This is a divergence from the French PMI data from last Friday, which had a strong beat, but this can be attributed to the more expectations-focused PMI. Off the back of this, the CAC jumped nearly +1.1 at the open before moderating down to +0.14% on the day. For Italy, the consumer confidence modestly beat expectations at 105.1 (vs 104 expected) and manufacturing confidence was up at 104.2 (vs 103 expected). Finally, Italian economic sentiment for February hit its highest level since July last year, up from 109.1 to 110.2.

In the UK, we heard from the BoE’s Bailey, who spoke on the recent Silicon Valley Bank crisis, emphasising that the recent turmoil we saw was “very different” to the financial crisis of 2008. However, Bailey did highlight that the BoE was “in a period of very heightened and alertness”, seeking to reassure investors that the “creditor hierarchy in UK is a cardinal principle.”

In terms of other, more backward-looking, data releases, we had the January FHFA house price index that beat expectations at 0.2% (vs -0.3% expected), as well as the February wholesale and retail inventories which were up 0.2% (vs -0.1% expected) and 0.8% (vs 0.2% expected) month-on-month respectively. The advance goods trade for February fell below expectations at -$91.6 billion (vs -$90 billion expected).

Finally, in commodity markets, oil extended its rally as the clash between Iraq, the Kurdistan Regional government, and Turkey has developed into a deadlock, curtailing exports equal to 400,000 bbl/day. Last night, US National Security Council spokesman Kirby said that the Biden administration had urged both the Turkish and Iraqi governments to allow oil to flow through the pipeline between the two countries while conducting negotiations. It was also reported that Genel Energy, which is a producer in the region said that they had storage for “several days of production.” WTI crude rose a more moderate +0.54% to $73.20/bbl yesterday after the huge moves the day before, while Brent crude gained +0.68% to $78.65/bbl. Oil is edging a little higher in Asia as well.

Now to the day ahead. In terms of data releases, we have the US February pending home sales, in the UK February net consumer credit, mortgage approvals and M4, in Germany the April GfK consumer confidence and lastly in France March consumer confidence data. Finally, we will hear from ECB’s Kazimir as well the BoE’s Mann.

When Lehman Brothers collapsed, Nomura was one firm that “snapped up” thousands of its former employees. But now that the same opportunity is presenting itself with Credit Suisse, the firm is being more cautious about opening its doors to new “talent”, according to Bloomberg. 

Nomura said that any additions to its staff will be on a “case by case” basis and that the firm has “no intention” of buying any of Credit Suisse’s assets. It’s not trying to “systematically” take on any of Credit Suisse’s staff, though the firm acknowledges it may eventually wind up with some formers. 

“We’re not going to suddenly hire, you know, 30 people because they happen to become available out of a one-off event. Our plans have not changed as a result of Credit Suisse,” Christopher Willcox, head of Nomura’s wholesale business, told Bloomberg. 

Willcox added: “Sometimes events like this look like they present you a huge opportunity, but there’s a risk when you do that. You then end up doing something quickly because it’s as a consequence of reacting to events.”

“Our agenda is organically building our capabilities,” he added. “In some ways in these situations, there’s a sort of tendency for people to look to, you know, shark-like behavior in terms of plundering the corpse of some of a firm where something’s gone wrong. I think that’s not the right way to think about this. I think about this as a very sad event.” 

Recall, just days ago we wrote that Credit Suisse employees were flooding headhunters, looking for new jobs. “Anxious Credit Suisse staff” created a flood of calls as they looked for new job with one firm in Singapore claiming it took in questions from 30 private bankers from Credit Suisse on Monday last week alone. 

Another firm, focused just on managing director hires, said it has received similar interest since last Friday. 

The bank has about 5,500 employees in London, leading one job search firm to be receiving calls all throughout last week, especially from bankers in the equities division, where there’s the most overlap with new parent company UBS. 

Michael Nelson, managing director at recruitment firm Quest Group in New York, said: “If they aren’t going to CSFB they will have to be emigrated into UBS fixed-income, which is a much smaller business than Credit Suisse. My guess is they will dismiss them and turn them out onto the street.”

Via SchiffGold.com,

Peter Schiff appeared on NTD News to talk about the bank bailout and the March Federal Reserve meeting. During the conversation, Peter explained that everybody is going to pay for these bailouts because they will ultimately devalue the dollar as inflation skyrockets.

During his press conference after the March FOMC meeting, Jerome Powell said the banking system is “sound and resilient.” Peter said it’s not sound at all.

It’s a house of cards that is starting to collapse.”

Peter explained how the banking system became so unsound.

First, the Federal Reserve kept interest rates at zero for over a decade. During that time, banks loaded up on low-yielding, long-term Treasuries and mortgage-backed securities. With interest rates so low, they had to go out further on the yield curve. And the reason they were able to take so much risk is because the government guarantees bank accounts. That created a moral hazard. Customers didn’t care what the banks did with their money because they knew the government would bail them out.

Thanks to the mistakes the Fed has made since the 2008 crisis, we have a much bigger bubble now. The Fed caused the bubble that led to the financial crisis of 2008, and then they inflated a bigger bubble to try to paper over those mistakes and kick the can down the road so that we wouldn’t have to deal with the full consequences of resolving all those mistakes. And of course, we just compounded the problem with bigger mistakes and now the US economy is poised on the biggest economic disaster in its history.”

In the wake of the failures of SVB and Signature Bank, Peter said it was the beginning of the next financial crisis. But virtually nobody in the mainstream is calling it a financial crisis. Peter compared the situation in 2008 with the situation today. In a nutshell, the 2008 financial crisis was about debt people ran up during a bubble and the inability of borrowers to pay when the air came out.

That’s exactly what’s happening now. It is a banking crisis, and banks are financials. I think people are reluctant to call it a financial crisis because they don’t want to evoke the memories of 2008 and they don’t want to make any comparisons. They don’t want to acknowledge that.”

Even as the subprime mortgage market was blowing up in 2007, people were insisting that everything was fine and “contained.” We’re hearing the same thing today as this crisis unfolds.

They are dismissing all the early signs of a major financial crisis. But make no mistake, we’re on the cusp of one. And it’s going to be much bigger than the last.”

Peter said the big event that banks can’t handle is a major economic downturn coupled with a rise in inflation.

So, if we have high inflation and a recession at the same time, banks are going to fail.”

Peter explained that with inflation devaluing everybody’s money, they will want to get it out of banks because banks won’t be able to pay an interest rate high enough to compensate for the loss.

Of course, when people want to get their money out of banks, the money isn’t there. So the only way people can get their money is if the Fed prints it. But if the Fed prints it, it just destroys even more of the value. So, it accelerates the momentum for a spiraling inflation.”

Treasury Secretary Janet Yellen, President Biden, and others insist that taxpayers won’t foot the bill for the bailout. So, who will pay for it? Peter said anybody who holds US dollars. That includes taxpayers, non-taxpayers, and people all over the world.

The dollar is being debased in order to fund the bank bailouts.”

In just two weeks, the Federal Reserve added nearly $400 billion to its balance sheet. That’s money created out of thin air.

That’s inflation. And so, when you do that, you destroy the value of all the money that’s already in circulation. So, Americans are going to pay, not because they are taxpayers, but because they are US dollar owners and US dollar earners. Everybody’s paycheck is going to be reduced in value because of the bank bailouts. These bailouts are endangering everybody’s bank deposits, even the banks that are solvent. Now it’s inflation that is the risk. And so it doesn’t matter if your bank fails. You’re still going to lose. In the event that your bank failed, you lose your money. But now, because the government won’t let the banks fail, everybody who has a bank account is going to lose purchasing power.”

In a surprise announcement, UBS Group AG revealed that its previous head, Sergio Ermotti, will reassume the role of CEO next week to supervise the historic acquisition of Credit Suisse Group AG.

Ermotti, who previously ran UBS for nine years, will start on April 5 after the bank’s annual meeting. He will succeed Ralph Hamers, who has agreed to step down. 

“The Board took the decision in light of the new challenges and priorities facing UBS after the announcement of the acquisition,” UBS said. 

Sergio Ermotti

The $3.2 billion acquisition of Credit Suisse by UBS, which occurred during an intense weekend earlier this month with the aid of the Swiss government to avert a broader bank crisis, unites the largest Swiss banks, essentially forming a megabank.

UBS shares in Zurich jumped as much as 3% at the start of the session on Wednesday, trading at about 1.5% as of early afternoon. 

A brief overview of Ermotti’s background: He was in charge of UBS from 2011 until February 2020, playing a pivotal role in the bank’s resurgence after the 2008 financial crisis. Ermotti is credited with restrategizing the bank’s core focus to less risky businesses, including scaling down investment bank operations while boosting its wealth management unit.

Colm Kelleher, UBS’s chairman, said in a statement:

“With his unique experience, I am very confident that Sergio will deliver the successful integration that is so essential for both banks’ clients, employees, and investors, and for Switzerland.”

Once Ermotti assumes control next week of the biggest banks in Switzerland, he will likely begin by winding down Credit Suisse’s investment banking operations and implementing extensive layoffs in overlapping divisions. 

Authored by Alexander Zhang via The Epoch Times,

The UK financial system is in a period of “very heightened tension and alertness” for further turmoil in the banking sector, Bank of England Governor Andrew Bailey has said.

The UK banking system remains in “a strong position” but the central bank has to be “very vigilant,” Bailey told the Treasury Committee in the House of Commons on Tuesday.

The central bank chief faced questioned from MPs amid global jitters following the collapse of Silicon Valley Bank (SVB) in the United States and the emergency rescue of Credit Suisse by Swiss authorities.

A security guard at the failed Silicon Valley Bank monitors a line of people outside the office in Santa Clara, Calif., on March 13, 2023. (Justin Sullivan/Getty Images)

There have been concerns that higher interest rates—following 11 consecutive rate hikes by the Bank of England—could be heaping pressure on lenders.

Bailey said the central bank is “very vigilant” but stressed that the UK banking system is in a different situation from the global financial crisis 15 years ago.

He told MPs: “I don’t think we are at all in the place we were in in 2007/8, a very different place, but we have to be very vigilant.

“We are in a period of very heightened tension and alertness and we will go on.”

‘Strong Position’

The collapse of SVB, the 16th biggest bank in the United States, is the largest bank failure since Washington Mutual in 2008, during the last financial crisis.

The group’s UK arm was sold to HSBC in a rescue deal, as shockwaves from the failure shook global financial markets.

Following the collapse, Chancellor of the Exchequer Jeremy Hunt said it posed “no systemic risk” to Britain’s financial system, but there was “a serious risk” to the UK’s technology and life sciences sectors.

A view of the Bank of England in London, on Feb. 2, 2023. (Yui Mok/PA Media)

Bailey told MPs that SVB’s collapse was the fastest failure since the collapse of Barings Bank, a British merchant bank that failed in 1995 after trader Nick Leeson concealed as much as £827 million in authorised trades, causing the business to run up massive losses.

The governor said: “The U.S. authorities are still dealing with some of the consequences of the issues and the issues with regional banks which we saw with SVB.

“My very strong view about the UK banking system is that it is in a strong position both capital and liquidity-wise. It is not showing signs of problems in that respect and we have tested very extensively.”

Bailey added in his evidence to MPs that the UK is experiencing tightening credit conditions, hinting that this could impact future decisions on rates.

“We see some evidence of some tightening credit conditions but we do not see a critical development in that respect. We always take into account credit conditions when setting monetary policy,” he said.

Protecting Deposits

U.S. Treasury Secretary Janet Yellen suggested that the U.S. government would safeguard people’s savings in the event another smaller lender like SVB collapsed.

In a speech at the American Bankers Association on March 21, Yellen said further steps would be made to protect bank depositors if smaller institutions suffer additional bank runs that threaten the country’s financial stability.

Commenting on the move, the Bank of England governor said:

“I perfectly understand what the U.S. has done because we faced the same challenge in 2008. It’s a very difficult decision, but in the heat of the moment there are times where you have to make that judgement.

“I agree with what I think Janet Yellen has said in that this is not a state of affairs that should be the norm, that all deposits are guaranteed.”

He added that it can be difficult to strike a balance between stopping “bank runs” happening by offering to protect savings, and ensuring deposit guarantees do not become the norm.

“I don’t for one moment want to criticise the U.S. authorities, as I think they have been dealing with a very hard situation,” he said.

No Appealing Options

MPs at the Treasury Committee also questioned bosses at the bank over the £2.6 billion sale of Credit Suisse.

Credit Suisse has had problems for years but was pushed over the edge a week ago because of market jitters sparked by the failure of SVB.

Swiss investment banking company UBS subsequently announced it would purchase Credit Suisse in a deal worth more than $3 billion.

Talking to MPs on Tuesday, Sam Woods, deputy governor at the Bank of England and chief executive of the Prudential Regulation Authority, said the central bank had been talking with other authorities over instability at Credit Suisse since last autumn.

“From October there were discussions involving the Fed, the Swiss authorities, and us, thinking about the live situation,” he said.

“We had discussed, ‘What are we going to do if it came to the crunch?’ It was very useful when it came to that weekend.

“In the end, a bit like Silicon Valley, none of the options were that appealing but you still had options.”

The world is in a precarious situation, with the potential for nuclear conflict. Central banks are taking aggressive measures to address decades-high inflation by raising interest rates, which in turn is causing a banking crisis in the Western world. As recession risks surge worldwide and international trade fractures, the future of the global economy appears to be heading down a dark path. 

“A lost decade could be in the making for the global economy,” Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics, warned in a new report. 

The report “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” reveals new forecasts that show global long-term potential output in growth rates are expected to slide: 

Nearly all the economic forces that powered progress and prosperity over the last three decades are fading. As a result, between 2022 and 2030, average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century—to 2.2% a year.

For developing economies, the decline will be equally steep: from 6% a year between 2000 and 2010 to 4% a year over the remainder of this decade. These declines would be much steeper in the event of a global financial crisis or a recession.

World Bank’s chief economist continued: 

“The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times—stubborn poverty, diverging incomes, and climate change.”

However, he said: 

“But this decline is reversible. The global economy’s speed limit can be raised—through policies that incentivize work, increase productivity, and accelerate investment.”

Ayhan Kose, director of the World Bank’s forecasting group, said the fracturing of the global economy implies “the golden era of development appears to be coming to an end.”

Earlier this year, the World Bank cautioned global central banks to stay alert to the economic risks related to aggressive monetary policy tightening aimed at combating inflation, as these risks may have widespread consequences. Just weeks ago, the emergence of a regional bank crisis in the US and problems with Credit Suisse in Europe demonstrated the validity of these concerns.

Besides a banking crisis, central bankers are also facing their nemesis… Stagflation…

While the global economy appears to be on a crash course with a ‘hard landing,’ no thanks to wreckless central banks, the World Bank said, “It will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one.” 

President Zelensky’s complaints over slowed and stalled rates of ammunition supplies coming into Ukraine from the West have perhaps been “answered” – in a story almost too absurd to be made up.

The “problem” has been uncovered, apparently: 

One of Europe’s largest ammunition manufacturers has said efforts to meet surging demand from the war in Ukraine have been stymied by a new TikTok data center that is monopolizing electricity in the region close to its biggest factory.

The data center in question is located in Norway, but chief executive of Nammo – short for Nordic Ammunition Company – has complained in statements given to FT that his company’s expansion (which is co-owned by the Norwegian government), is currently being prevented by the construction of a new TikTok data center which is going to suck up the area’s electricity. Nammo is among Europe’s biggest ammunition makers.

“We are concerned because we see our future growth is challenged by the storage of cat videos,” CEO Morten Brandtzæg told the Financial Times.

Given the statement sounds like it could be mere hyperbole, FT sought a statement from the local Norwegian energy company: 

Elvia, the local energy company, confirmed that the electricity network had no spare capacity after promising it to the data center as it allocates it on a first come, first served basis.

“If Nammo orders capacity, depending on how much it needs, it will take time before there is available capacity as the transmission network needs to be strengthened,” Elvia said.

The other irony is that Norway is a NATO-member. The emerging frustration and tensions between the state-linked Norwegian ammo maker and TikTok, owned by Beijing-based parent company ByteDance, is already leading to questions of whether this is some kind of intentional scheme linked to China’s geopolitical interests.

Interestingly, Brandtzæg sees its lack of access to surplus electricity needed for a plant expansion as directly impacting his company’s ability to keep up with demand based on Ukraine’s continuous needs:

Brandtzæg said demand for artillery rounds was more than 15 times higher than normal. The European ammunition industry needs to invest €2bn in new factories just to keep up with the demand from Ukraine, let alone other European countries, according to the Nammo chief executive.

One of those stories in which news threads converge.

An ammunition maker in Norway is struggling to expand a factory because a TikTok data centre is using up all the spare power

“Our future growth is challenged by the storage of cat videos”https://t.co/SBt43cWcN3

— Finbarr Bermingham (@fbermingham) March 27, 2023

He stressed: “We see an extraordinary demand for our products which we have never seen before in our history.” And more details from FT:

TikTok is building three data centers this year with the option of adding two more by 2025 in Hamar, 25km to the east of Raufoss, Norwegian data centre provider Green Mountain said this month.

Brandtzæg was asked whether be believes this is all purely coincidental, to which he responded: “I will not rule out that it’s not by pure coincidence that this activity is close to a defense company. I can’t rule it out.” This naturally leads to the question of where else is this happening in Europe?