Please see below todays (05/05/2023) Daily Investment Bulletin from Brooks Macdonald:
What has happened
Market sentiment on Thursday showed a split between continued worries around the health of US regional banks on the one hand, versus better than expected results from US tech heavyweight Apple. With Apple’s results announced after the regular market close however, they didn’t arrive in time to help the broader market, which closed lower on the day. For the day ahead, the focus is likely to stick with the banks sector, but elsewhere in economic news, US monthly non-farm payroll employment data for April is due – according to a Reuters survey, payrolls are expected to have increased by 180,000 jobs last month, which would be the smallest gain since December 2020 and which would be the third month in a row of deceleration in employment gains.
US regional bank worries continue
US regional bank news it seems is bookending the week. After the failure and sale of First Republic to JP Morgan at the start of this week, US regional banks resumed their share price slide on Thursday. In the crosshairs, PacWest’s share price has seen heavy falls this week on the back of a Bloomberg story that the bank was exploring sale options. While PacWest has since confirmed that “the company has been approached by several potential partners and investors – discussions are ongoing”, the bank has tried to calm market nerves, saying in a statement released yesterday that “the bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank”, and that “core customer deposits have increased since 31 March”.
ECB hikes and leaves door wide-open for more, in contrast to Fed’s latest signalling
The European Central Bank (ECB) hiked interest rates by 25bps on Thursday, taking its deposit rate to 3.25%, a post-2008 high, and up from a negative rate of -0.5% in less than a year when it first starting hiking in July 2022. While the pace of hikes was a downshift from 50bps at each of its previous 3 meetings, the ECB did not appear to follow the Fed regarding interest rate path outlooks. While the Fed on Wednesday hinted at a possible pause, the ECB left the door wide-open for additional tightening on Thursday. As well as plans to stop reinvestments of its Eur3.2trillion Asset Purchase Programme from July, ECB president Lagarde said there were “still significant upside risks to the inflation outlook”, and on future possible rate hikes that “we have more ground to cover and we are not pausing”.
What does Brooks Macdonald think
There is a something of a separation in the way that both policy makers and markets are thinking at the moment. For central banks, they continue to believe that they can separate the interest rate ‘inflation vs economic growth’ trade-off from bank stress. Equally, markets are continuing to take solace in the latest Q1 earnings beats, including from tech, and meanwhile treating the current US regional bank hiatus as non-systemic. How US regulators in particular tackle the thorny issues around their regional banks, both in terms of regulatory oversight but also in terms of the potential for any deposit insurance cap changes in the weeks and months ahead will be key.
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Andrew Lloyd DipPFS
05/05/2023