Overview

Global markets continue to be roiled by uncertainty. Shocks from both sudden events and the actions of market players and policymakers come together to produce exceptional volatility. We have already seen the biggest slide in US 2-year rates since 1987, and bond market volatility as indicated by MOVE remains at its highest since its introduction in 2019. Inflation readings continue to be elevated as well, and the specter of stagflation suddenly feels a lot more real. Other macro indicators such as China’s disappointing corporate profits also paint a gloomy picture looking ahead. Capital preservation remains the name of the game for the foreseeable future.

Looking at the markets, there is a danger right now of becoming consumed by short-term movements and missing the bigger picture. As a reminder, the collapse of Bear Stearns in March 2008 predated that of Lehman Brothers by 6 months and the market bottom in March 2009 by a full year. Regardless of direction, it will be some time before current events play out.

Banking Crisis

The current banking crisis is undoubtedly still at the top of everyone’s minds. With credit default swap (CDS) spreads blowing up and stock prices plunging, Deutsche Bank looks like it might be next on the chopping block. Despite the material differences between Deutsche Bank and Credit Suisse, Deutsche Bank has not been quite able to leave behind its history of run-ins with regulators. This same scrutiny by regulators has resulted in a strengthening of Deutsche Bank’s balance sheets and a series of restructurings that put it in a much better position to survive current and coming shocks. That said, losses of confidence can often be self-fulfilling, which is why regulators globally have been so eager to shore up confidence in any way they can. There is no small irony that in trying to do so, German Chancellor Olaf Scholz’s statement that there is “no cause for any kind of concern” ended up reminding many of Silicon Valley Bank CEO’s own right before its collapse.

Meanwhile, across the Atlantic, lending on the Fed’s balance sheet continues to expand as banks seek liquidity. Loans at the familiar discount window decreased while usage of the Fed’s new credit facility, the Bank Term Lending Program, ballooned. Outflows from smaller banks to larger ones continue, though there are signs of a slowdown. Overall, we see continued stress for many US and global banks, with global central banks stepping up as lenders of last resort.

First Citizen has agreed to acquire much of Silicon Valley Bank. First Republic Bank continues to be in limbo and Signature remains in receivership.

Equities and Crypto

In contrast to bond makers and the banking sector, US equities have performed well over the past two weeks. However, much of the current rally has to do with the strong performance of megacaps such as Alphabet and Microsoft as rate expectations adjust heavily downwards, potentially masking weaknesses in the broader market. Should these firms falter, we may see equities falling in line with other asset markets.

In terms of mainline crypto, Bitcoin has been moving sideways for the past week. There are signs of the current banking crisis affecting BTC liquidity despite its strong rally in the past month. This will manifest in the form of greater slippage and volatility as order books are thinned out, as well as a general easing of buying pressure. Binance’s spot market outage also briefly sent jitters across the markets, a reminder of potential counterparty risks.

Upcoming Calendar Events

• EU area preliminary inflation data (30, 31 Mar)
• US PCE data (31 Mar)
• Ethereum Shanghai upgrade (Mid April)

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