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Both the White House and the US Treasury Department raised objections on Tuesday to the decision by credit rating company Fitch to downrank the long-term US rating from AAA to AA+.
We strongly disagree with this decision,” White House press secretary Karine Jean-Pierre told reporters, claiming it “defies reality” because President Joe Biden has led the American economy to a “robust recovery.”Treasury Secretary Janet Yellen also “strongly disagreed” with Fitch’s decision, arguing it was “arbitrary and based on outdated data” and that US Treasury securities remained the world’s “preeminent safe and liquid asset.” Fitch is one of the big three US credit rating agencies, next to Moody’s and Standard & Poor’s. On Tuesday afternoon, it announced that Washington’s “long-term foreign-currency issuer default rating” would be downgraded, citing issues with governance, rising deficits, and a looming recession, among other things. The decision “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” relative to other countries with the similar rating over the past 20 years, “that has manifested in repeated debt limit standoffs and last-minute resolutions,” Fitch said. The company predicted a growing government deficit, noting that the US debt-to-GDP ratio was currently at 100.1%, two and a half times higher than the AAA-rated countries’ median of 39.3%. Fitch also cited the Federal Reserve’s recent credit rate hikes, “weakening business investment, and a slowdown in consumption” to predict a “mild recession” in the fourth quarter of 2023 and the first quarter of 2024.
In recent years, the stock market and Bitcoin have emerged as two powerful forces reshaping the financial landscape. While the stock market has long been a cornerstone of traditional investment strategies, Bitcoin, as the pioneer of cryptocurrencies, represents a new frontier for investors. The dynamic relationship between these two entities has captivated the attention of traders, analysts, and everyday individuals alike. In this editorial, we will explore the intricate interplay between the stock market and Bitcoin, shedding light on the evolving nature of investing in this digital age.
Conclusion: The intricate dance between the stock market and Bitcoin signals a new era of investing, where traditional and digital assets coexist and converge. The evolution of these two entities intertwines risk and opportunity, volatility and stability, and centralization and decentralization. As investors navigate this landscape, understanding the distinct characteristics, drivers, and regulatory frameworks surrounding the stock market and Bitcoin becomes imperative. Embracing this dynamic interplay has the potential to unlock new investment opportunities, foster financial inclusion, and shape the future of finance. Shares of several regional US lenders plunged on Tuesday after the collapse of First Republic Bank, the third major casualty of the biggest crisis to hit the country's banking sector since 2008. Los Angeles-based PacWest Bancorp, which has $41.2 billion in assets, and Arizona-based Western Alliance Bancorp, which has $68 billion in assets, led the steep selloff. Shares of both lenders were down by at least 15% on Tuesday, triggering investor concerns about the financial health of other mid-sized banks. The pair has shed more than $5 billion in market value so far this year. The KBW Bank Index, a benchmark index tracking the leading lenders, slumped 5.52%, hitting its lowest since December 2020. The S&P 500 Index sank almost 2% at one point. The embattled First Republic Bank was taken over by regulators on Monday and will be sold to JPMorgan Chase, America’s biggest bank, which will “assume all deposits, including all uninsured deposits, and substantially all assets” of First Republic in a $10.6 billion deal.
If a ‘confidence crisis’ can happen to First Republic, it can happen to any bank in this country,” CEO of Longbow Asset Management Jake Dollarhide told Reuters.Investors fear the latest turmoil, which began with the failures of Silicon Valley Bank and Signature Bank in March, could spread to other regional banks. Both were shut down by regulators following massive bank runs. “Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon,” senior market analyst at Oanda, Ed Moya, told Bloomberg. “Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the US could default on its debt next month,” he added. The selloff was driven by the threat of higher interest rates combined with high inflation data, making the situation worse and pointing to an economic downturn, economists say. Another bank is entering troubled territory amid the recent banking crisis that has spilled into global markets—this time in Germany.Deutsche Bank is facing fears of a collapse after shares dropped 11 percent on Friday morning, bringing those stocks down to a total of 29 percent since the bank chaos began on March 8. "We are still on edge waiting for another domino to fall, and Deutsche is clearly the next one on everyone's minds (fairly or unfairly)," Chris Beauchamp, chief market analyst at IG Group, told Reuters. "Looks like the banking crisis hasn't been entirely put to bed." Friday's stock market news is the latest development related to the fallout from the failure of Silicon Valley Bank (SVB) earlier this month, and the second involving a European bank. This week, Swiss bank Credit Suisse was rescued by rival UBS in a last-minute deal after Credit Suisse saw a plunge in share prices following the SVB collapse. Deutsche Bank's latest slump, driven partly by the Credit Suisse deal, signals that confidence in the banking system remains low. It marks the third week of decline for European banks, which fell 4.2 percent in the wake of the financial turmoil.
While many are worried it could be the next bank to collapse, other analysts have remained optimistic that it won't fall to the same fate as Credit Suisse. "We have no concerns about Deutsche's viability or asset marks. To be crystal clear - Deutsche is NOT the next Credit Suisse," research firm Autonomous said in a Friday report. German Chancellor Olaf Scholz has also dismissed the panic, saying that Deutsche Bank had "thoroughly reorganized and modernized its business model and is a very profitable bank," during a Friday news conference. In a Friday memo, JPMorgan strategists said that Deutsche Bank "had its own share of headline pressure and governance fumbles," but that it "still commands a relatively elevated cost base and has relied on its FICC (fixed income, currencies and commodities) trading franchise for organic capital generation and credit re-rating."
"Indeed, if there is anything depositors might learn from the past few weeks, both in the U.S. and Europe, it is just how far regulators will always go to ensure depositors are protected," JP Morgan wrote. Just a day earlier, Treasury Secretary Janet Yellen said the U.S. government was "certainly" prepared to take additional actions to stabilize banks—a shift in tone from her statements the day before, in which she said no such moves were being considered. The merger between Switzerland’s two largest lenders, the embattled Credit Suisse and UBS, could have a negative impact on the entire Western bond market, Bloomberg reported on Monday, citing analysts.
UBS agreed on Sunday to acquire its rival, which was on the brink of insolvency due to the loss of investor and customer confidence, for 3 billion Swiss francs ($3.24 billion) in stock. The deal, brokered by the Swiss authorities, came with a 9-billion-franc government guarantee for potential losses from Credit Suisse assets and 100 billion francs in liquidity assistance from Switzerland’s central bank. However, as part of the deal, Swiss financial market regulator FINMA ordered Credit Suisse to write down to zero some 16 billion Swiss francs ($17.24 billion) of its Additional Tier 1 (AT1) bonds, with the aim of bolstering the bank’s capital and resolving its liquidity problems. AT1 bonds are a riskier form of bank debt, which were created in the wake of the global financial crisis of 2008, and represent a type of junior debt that allows banks to transfer risks to investors instead of taxpayers in cases of financial difficulties. Investors find them attractive as they pay higher interest due to the fact that they carry more risk than regular bonds. While bondholders will be left with nothing, Credit Suisse shareholders will receive $3.23 billion under the UBS deal, despite the fact that bonds traditionally stand above equities in the banking hierarchy. The situation has angered bondholders, Bloomberg reports, as they now fear the authorities in other countries may follow the Swiss government’s lead. “It’s stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders… Wiping out AT1 holders while paying substantial amounts to shareholders goes against all the resolution principles and rules that were agreed internationally after 2008,” Jerome Legras, the head of research at Axiom Alternative Investments, an investor in Credit Suisse’s AT1 debt, has said. “This just makes no sense… Shareholders should get zero… it’s crystal clear that AT1s are senior to stocks,” Patrik Kauffmann, a fixed-income portfolio manager at Aquila Asset Management, who also holds the bonds, said. Some analysts, however, argue that the write-off of the bonds is a logical step, as this is part of the reason they were created – as a way to impose losses on creditors instead of taxpayers in case of bank failures. Overall, experts predict that either the AT1 market will soon be closed for new issuance, or the bonds will surge in price because of the extra risk displayed by the Credit Suisse rescue merger. Well, well, well, it seems the collapse of Silicon Valley Bank (SVB) has brought a certain individual back into the spotlight. Joseph Gentile, the bank’s Chief Administrative Officer, has been making headlines due to his past involvement with Lehman Brothers, the global finance firm that famously went bankrupt during the 2008 financial crisis. Yup, you read that right, the same guy who used to be Lehman Brothers’ Chief Financial Officer (CFO) is now at the center of attention in the SVB debacle.
SVB, once the premier financial institution for tech and health startup businesses in the US, has been in a rapid downward spiral since Friday, with customers starting to withdraw their deposits due to the bank’s investments being adversely affected by recently hiked interest rates.This led to California regulators handing over control of the bank to the Federal Deposit Insurance Corporation (FDIC) and a bid for its assets now underway. Ouch. But back to Gentile. Twitter has been abuzz with comments and takes on his involvement with SVB, with some likening the bank’s collapse to the 2008 crisis, while others have taken a more humorous approach. “Just in case you thought you were bad at your job, Silicon Valley Bank’s Chief Administrative Officer Joseph Gentile was the former CFO of Lehman Brothers,” tweeted Stock Talk Weekly. Neither Gentile nor SVB has commented on the situation, leaving many to speculate on what led to the bank’s downfall and what this means for the tech and health startup businesses it once served.Alf (not that Alf), the founder of The Macro Compass, had some pretty harsh words for the way they’ve handled things. Spent hours going through SVB’s financial statements and changed my mind on the topic. “These guys weren’t bad at risk management. They were outright horrific. They literally gambled billions away,” he said on Twitter. Either the level of incompetence was extreme, or a gigantic amount of moral hazard was at play. I think the latter, and if I am right this is really f*cked up.” It is early days yet to assess if the collapse of Silicon Valley Bank (SVB) will turn out to be a Lehman moment for the global financial system. SVB’s failure was triggered by factors different from the ones that precipitated the Lehman collapse or for that matter, India’s bad loan crisis. If those crises were about banks piling on credit risks on their loan books, SVB’s failure can be traced to mis-management of rate risks in its investment book.
Running an asset-liability mismatch to earn a spread is central to any banking business. But SVB stretched this concept much too far in deploying its copious deposit flows into long-dated treasuries and mortgage securities, which it parked mainly in its held-to-maturity (HTM) portfolio. As inflation rose and the US Fed raised interest rates by 450-475 basis points, SVB’s portfolio racked up large losses. The advent of the funding winter, which prompted start-ups to draw down their deposits, forced SVB to liquidate not just its Available For Sale bonds but also its HTM ones. The resulting $1.8 billion write-off followed by a failed attempt to raise capital, spooked the closely-knit start-up community to launch a run on SVB’s deposits. When interest rates shoot up in a short span, no bank can shield its investment book from losses. But SVB was more vulnerable to a run than a vanilla bank, because of its over-reliance on big deposits from a closed ecosystem — start-ups, their founders and VCs. The Federal Deposit Insurance Corporation has been quick to take over SVB, halting the run. But its ability to shore up dented depositor confidence in US banks, may depend on whether SVB’s uninsured depositors (who make up 90 per cent of its $175 billion book) will need to take haircuts. To prevent a snowballing effect on the start-up ecosystem, SVB’s clients may need to be thrown a liquidity lifeline to meet emergency payouts. As SVB had limited inter-linkages with other banks, a contagion effect on the US or global banking system from its failure, appears unlikely. But its collapse does call for stricter regulatory vigilance on other counts. With the previous crisis stemming from lending, the current global regulatory framework for banks focusses a lot on proactive accounting of bad loans and stress-testing their impact on capital adequacy. But the SVB crisis highlights that in a scenario of rapidly rising rates, banks’ investment books need an equal degree of scrutiny and stress-testing. The present expedient of allowing banks to sweep their bond losses under the carpet by owning large HTM portfolios, can lead to blow-ups. In India, the RBI may need to scrutinise bank books for depositor concentration. The SVB saga also offers a salutary lesson to global central banks that when they switch from extended ultra-loose monetary policies to uncalibrated, sharp rate hikes to quell inflation, they can inflict damage not just on growth, but also on financial system stability that they strive so hard to protect. US stocks have soared to unsustainable highs and could crash 26% within months, Morgan Stanley's top strategist has warned. In an analyst note the bank's chief US equity strategist, Mike Wilson, said that the current level of stock valuations could be compared to the “death zone,” a term in mountaineering describing an altitude so high that climbers do not have enough oxygen to breathe. “Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote. “This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they've been many times over the past decade,” he added.
The metaphor indicates the excessive levels that stock prices have climbed to since the start of this year. Wilson suggested the S&P 500 could tumble to 3,000 points within months, down about 26% from current levels, saying that “it’s time to head back to base camp before the next guide down in earnings.” The grim forecast follows what many analysts have called the worst year for the stock market since the 2008 financial crisis. All three indexes tumbled in 2022 with the Dow Jones Industrial Average ending the year down 8.8% while the S&P 500 sank 19.4% and the Nasdaq Composite plunged 33.1%. “The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn't coming,” Wilson’s latest note said. The strategist has repeatedly warned that the market rally won’t last as he expects inflation to prove stickier than many other economists forecast, forcing the US Federal Reserve to hike rates in order to bring soaring prices under control. |
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