1. Moving the markets

After the Fed pretty much met expectations yesterday with their latest policy on interest rates, which some saw as Powell being in the dovish camp, it was Treasury Secretary Yellen who stole the jam out of the bullish donut by clarifying that a broad increase in deposit insurance may not be in the cards.

Some analysts considered it to be a flip-flop, and the fallout was instant, as the markets crashed into the close, with the Dow plunging 530 points.

Today, it was “opposite day”, as bottom pickers stepped up to the plate and drove the Dow higher by over 450 points, assuming the much hoped for Fed pivot had now become reality. However, suddenly a glass ceiling was hit, the trend reversed and sent the major indexes back into the red. A last hour bounce insured a green close.

It turned out to be another chaotic day with uncertainty reigning supreme and a long-term trend in equities not being discernable.

Fed-watcher Philip Marey summed it up best:

“A final observation. The Fed continues to stumble its way through the fight against inflation. First, they tried to explain inflation away by claiming it was transitory. Consequently, they were late in starting the hiking cycle. Now that they are finally approaching positive territory for the real federal funds rate, they are close to ending the hiking cycle and leaving the rest of the fight against inflation to credit tightening by the banks. Because the Fed in its regulatory role failed to prevent the recent banking turmoil. Failing as a central bank on both fronts, so now it’s up to the banking sector to get inflation under control? What a mess.”

Bond yields were mixed. The 2-year dropped, popped, touched its 4% level, and then really dropped to close at 3.77%. The US Dollar fell for the 6^th straight day but bounced into the close.

Again, the hero was Gold, with the precious metal surpassing its $2k level and closing a tad above it. For the day, gold gained +2.63%, YTD it’s up +9.49%, which is way better than the S&P’s meager +2.80%.

1. Moving the markets

Even though the Fed did exactly what was expected, namely hiking rates by only 0.25% to the 4.75%-5% target range and confirmed that Quantitative Tightening (QY) will continue as had been assumed, the markets reacted violently.

Trying to spew some words of reassurance, Powell added:

The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.

Yet, he also added a hint of hawkishness by changing his reference about inflation from “has eased somewhat” to “remains elevated.” And “rate cuts are not in our base case.”

With traders dissecting his every word, uncertainty reigned after the release with the markets at first aimlessly bobbing and weaving, as the S&P chart above shows. However, in the end, chaos set in with traders and algos pushing the “sell” buttons and sending the major indexes plummeting into the close.

Regional banks took a hit, as ZeroHedge pointed out, with First Republic Bank getting hammered, while REITS lost their recent upward momentum again.  

Bond yields dropped, after an early rise, with the 2-year thriving and then diving back below its 4% level. The US Dollar dumped to 6-week lows, which gave Gold the opportunity to shine, and the precious metal delivered by rallying +1.82%.

Will the bulls grab the baton tomorrow and view this sell off as a buying opportunity, or will the bears rule? We’ll find out over the next few days.  

1. Moving the markets

Optimism ruled today’s session following Treasury Secretary’s latest assertions to contain the banking crisis. That’s all traders and algos needed to hear and up went, with the S&P 500 now having wiped out this month’s losses.

Regional banks recovered, as the KRE index added 5.6%, helped by Yellen’s announcement that the government would be ready to provide guarantees of deposits, should the crisis worsen. Even the much beaten down First Republic Bank surged some 34% after having lost 47% the prior day.

Right now, nothing else matters other than the Fed meeting in progress, with their announcement on future interest rates to be announced around 11 am PST tomorrow. Traders are expecting a dovish 0.25% increase, with a pause not on deck at this time, but a hawkish 0.50% hike would be a shock to market participants.

Concluded Bloomberg:

The Fed needs to weigh the small credibility cost of not adhering to Powell’s recent guidance, against the potentially very large credibility cost of presiding over a bank sector-induced economic slump.

On the other hand, a significant dovish surprise might suggest that the Fed knows something very worrying that the markets don’t, and this signaling effect would be potentially just as risky as being too hawkish.

Uncertainty reigns and, as a result, bond yields moved higher and extended yesterday’s bounce-back, as the 2-year soared 24bps to solidly reclaim its 4% level.  

Finally, the short-squeeze proved to have some legs but, as this chart indicates, it’s far from certain, based on the recent past, if this move will be followed by any duration.

Even though the US Dollar limped lower for the 4^th day in a row, Gold was not able to capitalize and pulled back from its $2k level.

Again, nothing matters until Fed head Powell bestows his latest words of wisdom upon us.

1. Moving the markets

Market bulls received news on the banking crisis that they interpreted as hope that things are not as bad as feared due to the takeover of Credit Suisse by UBS, which appeared to be nothing more than a forced wedding by the Swiss government.

The broad markets advanced, and even regional banks rebounded a tad from their big losses last week with the KRE index recovering 1.2% after having tumbled 14% during the prior 5 trading days.

In my view, the crisis has barely started, but at least for the moment, issues are said to be contained with all eyes now focused on what the Fed will do regarding interest rates when they meet this coming Wednesday.

Still, First Republican shares crashed 48% to a new record low, as ZeroHedge reported, despite last week’s $30 billion inflow bailout. Ouch! Could this be a harbinger of things to come?

For sure, if you were a Credit Suisse AT1 bondholder, you lost 100% of your investment during the merger, as equity holders received preference courtesy of Swiss taxpayers, while these bonds were wiped out.

US Bond yields closed higher, with the 2-year staging a wild ride, as the US Dollar slipped. Gold ramped past its $2k level but pulled back into the close for a modest gain.