© Reuters. FILE PHOTO: The Federal Reserve Building in Washington, US, on March 19, 2019. REUTERS/Leah Mellis/File Photo
Written by David Randall
NEW YORK (Reuters) – Investors are bracing for a prolonged squeeze in the U.S. stock market, bracing for more turmoil in the banking sector and concerns about how the Federal Reserve’s tightening will affect the economy.
Financial stocks in the US moved sharply throughout the week after the collapse of US lenders and last week’s seizure by the Swiss government of troubled Credit Suisse by UBS.
“The volatility will continue because we still don’t know the extent of the turmoil in the banking sector,” said Cameron Dawson, chief investment officer at NewEdge Wealth.
Many worry that other nasty surprises are lurking just as a series of rapid rate hikes by the Fed over the past year has dried up cheap money and widened divisions in the economy.
“Investors act first and consider the nuances later,” said Wei Li, chief global investment strategist at fund giant BlackRock (NYSE: NYSE). It’s understandable because it’s not entirely clear that it was definitely contained. ”
In recent days, investors have focused on Deutsche Bank (ETR:) , whose shares have lost about a quarter of their value this month, including Friday’s 8.5% drop, the cost of protection against default on its bonds has risen, although a few put it in a category with Credit Suisse.
“We are not concerned about liquidity and counterparty issues” with Deutsche Deutsche, JPMorgan analysts said on the New York Stock Exchange on Friday.
For now, few investors see this year’s events as a repeat of the systemic crisis that swept markets in 2008, bringing down Lehman Brothers and prompting government bailouts.
But investors are wary of further inflows from banks if people think US or European regulators will not step in to protect deposits.
said Tim Murray, capital market strategist in the multi-asset division of T. Rowe Price.
Murray is underweighting stocks, and is focusing on money market accounts that offer returns similar to Treasury notes.
“very unusual”
The widening divergence between the Federal Reserve Fund rate and the much lower interest rate on checking accounts raises the risk of bank deposit outflows, said chief economist at Apollo Global Management (NYSE: Torsten Slok). The Fed raised interest rates by 25 basis points on Wednesday to a range of 4.75% to 5%.
“Higher rates as a source of instability for deposits and treasury holdings is highly unusual compared to previous banking crises, where the source of instability was usually credit losses, resulting in downward pressure on the non-liquid side of banks’ balance sheets,” he wrote in the newspaper. Note on Saturday.
Data released on Friday by the Federal Reserve showed that deposits in small US banks fell by a record amount after the collapse of the Silicon Valley bank on March 10.
Meanwhile, data released on Thursday showed that emergency federal lending to banks, which hit record levels, remained high in the latest week amid persistent jitters.
“We’re closely watching all the data on how much liquidity is being withdrawn from the various Fed facilities,” Dawson said. “If we continue to see utilization of these facilities, it could indicate that more banks are feeling funding constraints or liquidity needs, which means the contagion may not be over.”
The US authorities are considering expanding the bank’s emergency lending facilities in ways that would give First Republic Bank (NYSE::) more time to shore up its balance sheet, Bloomberg reported Saturday, citing people familiar with the situation.
A crisis of confidence
Uncertainty about the Fed’s intentions is also amplifying stock investor reluctance and sparking wild swings in US government bond prices, after policymakers signaled they were about to pause further hikes as banking-sector concerns risk tightening economic conditions.
Investors have piled into the safe haven of US Treasuries over the past week, sending yields on the two-year note, which closely mirrors the Fed’s policy outlook, to 3.76%, the lowest since mid-September.
More banking industry failures could mean a rate cut sooner as weak financial conditions allow the Fed to ease its fight against inflation, said Tony Rodriguez, head of fixed-income strategy at Novin. Futures indicate that the Fed will start cutting interest rates by the end of the year.
Rodriguez said lower interest rates would make dividend-paying stocks and some riskier assets such as sub-investment-grade high-quality bonds attractive.
Risky assets have been fairly resilient despite concerns in the banking sector, said Jason England, global bond portfolio manager at Janus Henderson Investors. It’s up 3.4% this year, although far from its highs in early February, and it’s up 1% this week, helped by a rally in technology stocks.
“If inflation comes down because of the turmoil in the banks and creates a squeeze on homeowners, then suddenly the Fed has done its job,” he said.
England expects long-term bond yields to start to rise from current levels, making short-term bonds and money market funds more attractive.
In fact, a lot of investors seem to ignore the stock. The latest survey of fund managers from BoFA Global Research showed that allocations to US equities fell to an 18-year low while cash allocations rose in March.
Katie Nixon, chief investment officer, Wealth Management, said Northern Trust (NASDAQ:) , which focuses on technology stocks with its “Fortress Balance Sheets”.
“It’s a crisis of confidence now and everyone is looking for a direction,” she said.