Please see below article received from Brooks Macdonald today, which provides a global market update for your perusal.
What has happened
With markets having run out of fresh reasons to panic, we saw a marked rally across the board in risk assets on Tuesday. Equities, and importantly including bank stocks, saw a major recovery, and sovereign bond yields pared back a good chunk of their declines suffered in recent days. On some measures, US and European banks saw their best positive trading day in 4 and 5 months respectively on Tuesday. In US Treasuries, the 2-year yield saw it’s biggest one-day rise since June last year. Also supporting yields, the US CPI print for February, out yesterday, saw another repeat of the sticky-inflation narrative, with US core CPI month-on-month up 0.5%, above the 0.4% consensus estimate.
Panic over, no global financial meltdown after all?
After the SVB-driven risk-version over the past week, markets seemed to be settling back into a more constructive mood on Tuesday. At their simplest, banks’ operating models are intrinsically linked to a liability-asset duration mis-match… after all, it’s in a bank’s DNA to borrow short (deposits) in order to lend long (loans), and profit from the interest rate spread less some provisioning for the risk of loan-defaults. The fact that banks might choose to park excess deposits into generally-considered-risk free assets such as government bonds is not necessarily bad in and of itself. If banks can hold to maturity, then in nominal terms, there is no risk (assuming we’re not worrying about a government default). As we’ve seen from the SVB debacle last week, the problem arises when a bank cannot hold to maturity, where the discounted mark-to-market price of a bond reflects the impact of the remainder of the bond’s life in real terms. With the Fed now allowing banks to swap Treasury holdings for cash loans at par (the value that the bonds were originally issued at) through a so-called Bank Term Funding Programme (BTFP), this has significantly eased that problem. Initially, the BTFP is to run for one year, but frankly, given the hitherto history of central bank QE-led intervention over the years, it’s probably not a big stretch to assume this programme could be extended if it were needed.
Not yet all clear for bank profit margins though?
Whilst the consensus is that we are not facing financial systemic risk after all, there is still the problem of varied margin impacts for banks. The speed of interest rate hikes over the past year provided a boost to banks’ net interest margins, as interest rates on loans repriced quicker than deposits. The events over the past week have reminded us that with greater competition for deposits, this has given rise to concerns of whether we have seen peak net interest margins for the time being. That said, some relative perspective is important – given we have mostly moved-on from a world of zero interest rates, with interest rates higher and likely to be around these higher levels for some time, the medium-term outlook for bank profitability in aggregate is still arguably much better than it was over the past decade or so.
What does Brooks Macdonald think
With the SVB-induced volatility in recent days now falling, markets are turning back to weighing up the latest economic data, and how it might influence interest rate policy ahead. We have the ECB rate decision up tomorrow, and then it’s the turn of the Fed next week. How these and other central banks balance the recent bout of worries around financial conditions, versus still sticky-inflation pressures, will clearly be the key focus over the near term.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | 0.9% | -4.6% | -4.9% | 2.0% | |
| MSCI UK GBP | 1.1% | -3.5% | -3.5% | 3.1% | |
| MSCI USA GBP | 1.8% | -4.3% | -5.2% | 1.9% | |
| MSCI EMU GBP | 1.8% | -3.6% | -1.8% | 9.0% | |
| MSCI AC Asia Pacific ex Japan GBP | -1.7% | -6.8% | -7.3% | -1.3% | |
| MSCI Japan GBP | -3.4% | -5.6% | -3.6% | 0.7% | |
| MSCI Emerging Markets GBP | -1.6% | -6.8% | -6.7% | -1.6% | |
| Bloomberg Sterling Gilts GBP | -0.8% | 2.6% | 0.6% | 1.7% | |
| Bloomberg Sterling Corps GBP | -0.9% | 1.0% | -0.8% | 2.4% | |
| WTI Oil GBP | -4.6% | -10.5% | -9.8% | -11.6% | |
| Dollar per Sterling | 0.0% | 2.7% | 0.0% | 0.7% | |
| Euro per Sterling | 0.0% | 1.1% | -0.1% | 0.4% | |
| MSCI PIMFA Income GBP | 0.4% | -2.1% | -2.8% | 1.6% | |
| MSCI PIMFA Balanced GBP | 0.5% | -2.5% | -3.1% | 1.8% | |
| MSCI PIMFA Growth GBP | 0.8% | -3.4% | -3.8% | 1.7% |
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World USD | 0.9% | -2.1% | -5.0% | 2.6% | |
| MSCI UK USD | 1.1% | -0.9% | -3.5% | 3.7% | |
| MSCI USA USD | 1.7% | -1.8% | -5.2% | 2.5% | |
| MSCI EMU USD | 1.8% | -1.0% | -1.8% | 9.7% | |
| MSCI AC Asia Pacific ex Japan USD | -1.7% | -4.3% | -7.3% | -0.7% | |
| MSCI Japan USD | -3.4% | -3.0% | -3.7% | 1.3% | |
| MSCI Emerging Markets USD | -1.7% | -4.3% | -6.7% | -1.0% | |
| Bloomberg Sterling Gilts USD | -0.9% | 5.0% | 0.5% | 2.7% | |
| Bloomberg Sterling Corps USD | -1.0% | 3.3% | -0.9% | 3.4% | |
| WTI Oil USD | -4.6% | -8.1% | -9.8% | -11.1% | |
| Dollar per Sterling | 0.0% | 2.7% | 0.0% | 0.7% | |
| Euro per Sterling | 0.0% | 1.1% | -0.1% | 0.4% | |
| MSCI PIMFA Income USD | 0.3% | 0.5% | -2.8% | 2.2% | |
| MSCI PIMFA Balanced USD | 0.4% | 0.2% | -3.1% | 2.4% | |
| MSCI PIMFA Growth USD | 0.7% | -0.8% | -3.8% | 2.3% | |
Bloomberg as at 15/03/2023. TR denotes Net Total Return.
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Chloe
15/03/2023