Overview

The past week has been filled with events that have moved markets, but not quite enough to establish a clear trend. Meanwhile, uncertainty about the future remains high, even as VIX values hit one year lows on 28 April. Expect market volatility to increase in the coming weeks as markets become untethered from its holding pattern waiting on calendar events and attempt to start establishing a narrative once more. Markets and the Fed look to be in another standoff over rates. Whatever happened to “don’t fight the Fed”?

Equity

Equity markets have swung between the top and bottom of the trading range established since 31 March. Regional banking shares have come under pressure once again, despite repeated reassurances from authorities. Share prices collapsed last Wednesday and Thursday before recovering on Friday. Such movements have been distinctly uncomfortable for some, with calls emerging amongst bankers for investigations into “abusive” short selling. It remains to be seen if such abuses emerge or if short sellers are simply ahead of the curve. After Silicon Valley, Signature and First Republic, there is a certain richness to regional banks blaming short sellers.

Tech giants continue to show strength, with Apple (AAPL) earnings proving encouraging. Friday’s pop can largely be attributed to strength in the most valuable traded company in the world, supported by a partial recovery in regional banking shares.

Policy Concerns

With the May FOMC meeting panning out largely as expected, ending with a 25 bp bump and the Feds signaling a possible pause in rate hikes, the market’s attention has turned to the future. However, a point that may have slipped under the radar is that the Feds do not expect a rate cut before the end of the year, though they have left enough wiggle room in their words to suggest that a cut is possible. This is in stark contrast to bond markets that have priced in a good chance of a rate cut as early as the July meeting (33% as at the time of this writing). Essentially, the Fed is saying one thing and bond market traders are trying to call its bluff, convinced that the current liquidity crisis and potential recession will force the Feds’ hands much earlier than expected. Part of that is an expectation that the Fed’s data is not he most accurate, and that strong looking data is breeding unwarranted optimism. Job openings as a datapoint is basically moot at this point and labor data as a whole has seen repeated adjustments in recent months that suggest the data is far from good. This likely also goes some way in explaining the market’s tepid reactions to the latest NFP data.

Ultimately, only one side will be right and the upcoming showdown will not look pretty regardless of which side is proven right. Meanwhile, equity market prices somehow seems to have internalized the contradictory expectations of upcoming rate cuts and no recession. Expect at least one more test downwards for equity markets as determined bears try to break greedy but flighty bulls.

Meanwhile on the fiscal side, the x-date, where the US Treasury will not be able to meet its financial obligations, is swiftly approaching. Markets look sanguine, seemingly resigned to the brinkmanship on display and not expecting a resolution until right before the deadline. The potential for a default seems almost unreal, but playbooks should be made for a potential credit event, just in case. That a default has never happened does not mean it will not, and suggests global financial systems will be poorly equipped to deal with the fallout.

Crypto

BTC liquidity issues have made themselves apparent in another way, with Binance forced to put up short withdrawal freezes. It remains to be seen what the outflow of BTC from Binance means.

More transparently, the Ethereum Foundation has sold a tranche of ETH. Historically, the foundation has done a pretty good job look for market tops to offload a little bit of the tokens they have on hand.

Upcoming Calendar Events

• China trade data (9 May)
• US CPI data (10 May)
• BoE policy decision, US PPI data, China CPI and PPI data  (11 May)
• US Consumer Sentiment, Preliminary (12 May)
• Various comments by Feds (8 – 12 May)

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