The Long and Short of it, week ending 17 March 2023
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Banking system concerns, inflation and this week’s FOMC meeting dominated the market’s attention last week. FDIC, Treasury and Fed support provided to Silicon Valley Bank fleetingly shored up banking concern sentiment but the precarious position of First Republic Bank (as well as of Swiss bank Credit Suisse) despite support received by the Fed and a consortium of large banks sharply weakened it. Expectations of the Fed not raising rates this week increased from 0% to (at one point) 33% in the face of banking system concerns and despite a CPI release (Tuesday) showing core inflation increased MoM. Indeed, the Fed’s balance sheet, which the Fed has been strenuously working to reduce, increased $300 billion last week as the Fed acted to provide needed liquidity to the banking system. The 10-year Treasury rate dropped 26bps, moved not only by a flight to quality but also on expectations of less aggressive Fed monetary policy. Reflecting those expectations as well, the Nasdaq Composite Index strongly outperformed the other 2 major indexes, gaining over 4% compared to an almost unchanged Dow Jones Industrial Average and an up 1% S&P 500 Index. The 4 largest tech stocks – Alphabet, Amazon, Apple and Microsoft - had their best week in a long time (Microsoft increased the most, jumping 12% higher). For the week, the S&P 500 Index increased 1.4% to 3,916.64, the Nasdaq Composite Index rose 4.4% to 11,630.51, the Dow Jones Industrial Average decreased 0.2% to 31,858.89, the 10-year U.S. Treasury rate fell 26bp to 3.44% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) weakened 0.7%.
European stock indexes, amidst a volatile week, moved markedly lower last week. Both the STOXX 600 and FTSE 100 Indexes oscillated between sharp gains and losses each day last week, reacting to quickly changing bankingsector market sentiment. Banking-sector concerns in the U.S. were initially the primary motivation to those same concerns in Europe, with European indexes moving – direction wise – lockstep with U.S. indexes. However, news of Credit Suisse’s distress Wednesday and the subsequent apparent indifference to the Swiss National Bank’s rescue package sharpened concerns, pushing stock index levels markedly lower. Expectations of the ECB increasing rates 25bps in their decision Thursday were proven misplaced with the ECB announcing a 50bp hike, stating inflation was the foremost concern (euro zone inflation was marginally lower last month but with rising services prices) and the banking system was sound. Nonetheless, the absence of guidance – previously suggesting rate increases would continue – seemed to indicate the ECB may adopt a less aggressive monetary policy going forward. As in the U.S., longer-term government rates fell sharply last week, reflecting both a flight to quality and expectations of easing (i.e., less aggressive) monetary policy. For the week, the STOXX 600 Index fell 3.8% to 436.30, the FTSE 100 Index dropped 5.3% to 7,335.40, the 10-year Gilt rate fell 32bps to 3.31%, the 10-year Bund rate dropped 39bps to 2.11% and the British pound and euro strengthened 1.3% and 0.2%, respectively, both with respect to the U.S. dollar.
Top performing ETPs over the week
| . | 3x Long ETPs | 3x Short ETPs | ||
|---|---|---|---|---|
| UK | +3x Rolls-Royce (3LRR) | +1.7 % | -3x Barclays (3SBC) | +66.1% |
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The Long and Short of it, week ending 17 March 2023
