First the Silicon Valley Bank, then the Signature Bank. After 48 hours of turmoil, the storm on the markets seems to have abated, with investors now turning their eyes to the central banks hoping that what happened will lead the hawks towards milder advice. But where does the crisis that some American banks are experiencing come from? "There are bank errors, who have invested in long-term instruments that have lost value with the rise in interest rates”. and there is a clear lack of oversight by regulators. ", explains Alessandro Fugnoli in the latest installment of his podcast "On the 4th floor".
However, according to the Kairos strategist, the mistakes mentioned so far are not the only ones. To the list must be added the "flight of depositors from the near-zero yields offered by banks towards the much more attractive yields offered by short-term Treasuries". An emigration that up to now has not worried the banks, but which, if it becomes larger, could force the institutions concerned to liquidate their securities at a loss, eroding their capital.
Until now, underlines Fugnoli, the response of the Federal Reserve and the US Treasury to a crisis that shook the wrists of many investors, causing the ghost of Lehman Brothers to resurface, was very rapid: banks were offered loans on extremely generous terms and bailed out depositors of failing banks. “This response is intended to restore confidence and slow down the flight of depositors. It will probably be effective. However, two problems will remain open”, comments the economist.
The two problems of the American banking crisis
The first problem, according to Fugnoli, concerns the fact that only deposits up to 250 thousand dollars are up to now guaranteed. The second is that the gap between yields on deposits and those on government bonds will have to shrink. Otherwise the banks will sooner or later find themselves in a liquidity crisis. From here a further problem could arise: "increasing the yield on deposits will however reduce the margins of the banks, already affected by the inverted rate curve", he warns.
The distance between bonds and shares is reduced
To date, ithe cycle of rate hikes it hit bonds far more than equities, creating "an evident overvaluation of equity compared to bonds", Fugnoli points out. This However, the distortion begins to decrease, making bonds recover and equities depressed. “For a balanced portfolio these movements offset each other, provided that the bond portion is invested in medium-long term instruments, advises the strategist, who adds: “an important support for equities could come from monetary policy if the Federal Reserve it will interrupt the rate hike cycle sooner than expected and will stand still for a few months to observe the situation”.
All eyes are now on the next meeting scheduled for March 22nd.
“It will be important for the Fed and the markets to watch the trend of inflation”. The first good news arrived on 14 March: prices in February grew by 0,4% compared to January. The "core" data, i.e. the one excluding the food and energy prices component, increased by 0,5%, against expectations for a rise of 0,4%. On an annual basis, the general figure recorded +6%, the lowest since September 2021, after +6,5% in January. The "core" figure grew by 5,5%, after +5,6% in January, in line with expectations; this is the lowest figure since December 2021.
According to Fugnoli, if the drop in inflation is confirmed, “then many of the tensions in the economy and markets will ease. If, on the other hand, inflation settles at a level that is too much above 2 per cent, the Fed, perhaps towards the end of the year, will have to consider the hypothesis of raising rates again or, more likely, will delay in the spring of 2024 the start of the rate reduction cycle”.
Bonds and shares: how to invest?
What is, on the basis of these evidences and these forecasts, the advice for investors? “Investors need to plan for slightly longer cyclical recovery times. In fact, the slowdown of the economy is still in its infancy and will pick up speed in the coming months. However, 2024 remains the year of recovery. The coming months will therefore be exploited for a slow and gradual accumulation of risk. In this phase, liquidity can be fruitfully parked in short and safe instruments”, concludes the strategist.
