It seems like a nervous calm has swept through the market.

I started the week telling people never say never about Deutsche going down, but now it seems like the panic was a storm in a teacup based on the illiquidity of the CDS market..

Frances, did you see this from the FT about how the CDS market just isn’t what it used to be?

https://www.ft.com/content/03bbdf9c-35a6-4851-aa8d-caa4d0fe88c9

The European Central Bank’s top supervisor has claimed “opaque” trading in credit default swaps is harming banks’ share prices and could threaten a run on deposits. Andrea Enria, chair of the ECB supervisory board, called for a review of the market after sharp moves in the prices of CDS preceded a sudden drop in the shares of Deutsche Bank and other European lenders last Friday. “With a few million you can move the CDS spread of a trillion-euro-asset bank and contaminate of course stock prices and possibly also deposit outflows,” Enria told a conference in Frankfurt. “So that is something that concerned me a lot.”

Why has the liquidity disappeared? Do we know?

It reminds me of the time Glencore CDS exploded randomly and nobody quite knew why. And I think even now we still don’t really know/

Of course, the CDS market did lose the great Blythe Masters for blockchain business, so maybe that’s the problem?

????

But it’s worrying for banks.

Anyway, European markets are up on the back of all those lovely guarantees that are pushing the global liquidity situation comfortably above the lowest comfortable reserve threshold – even as cbanks continue to lift rates.

 All green today

But there’s been some news on Unicredit

UniCredit gets ECB approval for 3.34 bln euro share buyback

https://www.reuters.com/business/finance/unicredit-gets-ecb-approval-334-bln-euro-share-buyback-2023-03-28/

Isn’t that supposed to make the share price go up?

https://www.ft.com/content/36857e76-8d06-4bc3-a67d-455791a54ca0

The chart i really find fascinating with respect to the current mismatch between market valuations and actual bank performance is this one:

So which one will it be?

It’s either a signal that there is mass asset deterioration and income collapse to come…

or it’s a signal that the market is underpricing bank stocks on a massive level.

I’m going to side with the former.

Frances, you’ve been looking at some broader indicators as well?

Fed rate hikes seem to be working, but this comes at a cost. The Philly Fed surveys I posted yesterday show manufacturing activity actually contracting and services growth slowing rapidly.

side note: falling business activity will feed through into falling CRE prices…

And also into higher unemployment. Unemployment is low by historical standards but that can change rapidly.

Claudia Sahm’s “rule” says that NBER recessions are always predicated by a sharp rise in unemployment.

(Claudia Sahm, former Fed economist)

Job vacancies have been high but are now falling:

Which is a bad signal for commercial real estate, and housing generally.

in the US, construction is a leading recession indicator

The Fed is signalling more rate rises to come, perhaps to prove that monetary policy is independent of banks and markets. But according to Morgan Stanley, bond markets are pricing in 100bps of cuts from June.

I think Morgan Stanley’s economists are a bit optimistic.

We’ve seen standoffs between bond markets and central banks before, and central banks rarely if ever win, though they usually claim their eventual climbdown was a deliberate policy change in the light of new evidence.

I hope

So sounds like pretty big news that the capital buffer is staying at2%

like they did during Covid

2% is no change, i take it?

If anyone knows otherwise, then speak now or forever hold your peace.

ahhhh…. !

Frances is making funny noises

Turns out it’s an increase

You raise the buffer when risks increase

it is making them reserve more on the assumption we are still in a period where you can do that ????

So it’s prelude to a crisis, rather than in a crisis.

They either have to reduce their risk-weighted assets or raise more capital

so they have to de-risk – which presumably on this occasion means they have to hedge their interest-rate risk?

Here’s a question for the rabble, if you are a German financial institution with a lot of negative-yielding debt on your H2M portfolios, how exactly do you hedge a negative yielding bond?

Because you can’t really swap fixed-for-floating can you? Or can you?

It makes my head hurt

While I await enlightenment, just a note to say ECB’s Lane has been speaking (via POLITICO):

FRANKFURT – The eurozone is unlikely to see a major accident on financial markets, European Central Bank chief economist Philip Lane said in an interview published today, adding that interest rates will likely continue to go up.

“Of course, we are monitoring developments closely and are vigilant, but we do not believe that the same situation as in the US or Switzerland is the most likely scenario here in the eurozone,” Lane said in an interview with Germany’s Die Zeit. “We have no reason to believe that a major problem will arise.”

Should this be the situation, the ECB will continue to lift rates, Lane said.

“In our base case, further rate hikes are needed to ensure inflation falls to 2 percent,” he said. “If the financial stress we’re seeing, while not zero, is proving to be fairly contained, interest rates need to go even higher.”

Again, personally, as an ancient historian, i would never be so confident as to say such things, as the gods tend to frown on such overconfidence and reward with hubris.

But there’s also some news from Brussels (also via POLITICO):

The European Commission will bring forward changes to the rules for mid-size bank failures on April 18, according to the latest agenda for the College of Commissioners.

The plans were pulled at short notice in March amid tensions with EU capitals over national fears of being on the hook for losses in another country.

But the banking crisis may have reignited the impetus for the reforms following a series of bank failures in the U.S., including tech lender Silicon Valley Bank, and the demise of Credit Suisse.

The EU’s reforms aim to bring more mid-size banks into the resolution framework, so that shareholders and creditors rather than taxpayers bear losses in a collapse.

This is following them dropping the whole banking union thing from their agenda just before the crisis

@helmholtz – that’s what i thought! So it’s all very well them urging banks to derisk, but there’s nothing you can do if you’ve acquired negative yielding bonds and can’t sell them in the market now.

So you’re trapped materialising losses either way

@graham halliday – yes a negative yielding bond

That countercyclical buffer increase looks like a nothingburger to me

Because it doesn’t address the problem that the US banks encountered

The US banks had enormous quantities of zero-risk-weighted government securities, mostly in HTM portfolios.

So they had massive Tier 1 capital ratios – Silvergate’s was over 50% when it failed

But if you sell or pledge securities to raise money to meet your obligations, the maximum you can raise is the market value of the bond, not the face value

So they couldn’t raise enough money from those bonds to finance the catastrophic runs they suffered

Tweaking capital ratios doesn’t solve a liquidity problem caused by fair value losses on HTM securities

when those securities are zero-risk weighted anyway

But really this gets us back to the point that the system itself seems to be crying out for full-reserve.

this is absoltuely amazing really

we have a banking crisis of solvent banks

Even bailey said yesterday that Credit Suisse was likely solvent.

On the First republic story, someone pinged me that it’s worth checking out who their clients are.

And if that’s why there’s been a rush to rescue them.

Here’s one indicator

https://www.reuters.com/business/finance/how-first-republics-courtship-wealthy-led-meltdown-2023-03-27/

Facebook founder Mark Zuckerberg obtained a First Republic 30-year mortgage of $5.95 million on a Palo Alto, California home at an interest rate starting at 1.05%, according to a 2012 Bloomberg article. Other customers have included Instacart founder Apoorva Mehta, investor Chamath Palihapitiya and real estate developer Stephen M. Ross, according to bank promotional materials.”

Speaking of American bank failures, the crypto people are up in arms about the seizure of Signature Bank NY

They are claiming it is all part of a federal conspiracy to choke off access to banking for crypto companies and traders

They call it Operation Chokepoint 2.0

They say SBNY was a solvent bank which the NYDFS closed down and put into FDIC receivership opportunistically following the failures of SIlvergate and SVB

Paper is here

i do think there is a bit of a coordinated clampdown to be honest

Regulators realised that retail depositors were at risk and there was growing risk to financial stability too

So I do think there is a coordinated clampdown going on

I did want to flag the following

Apparently, according to the Telegraph the net zero ban on petrol cars is in “CHAOS” because the Germans managed to achieve an e-fuel carve otu

Poland was the only country that voted against.

Here’s the Telegraph:

https://www.telegraph.co.uk/business/2023/03/28/net-zero-ban-petrol-cars-chaos-brussels-climbdown/

But I especially loved Politico’s story which reminded everyone about Hitler’s love of e-fuels:

That’s from their premium Pro site.

Anyway, the subtle insinuation that the Germans have gone full nazi again is, err, provocative to say the least ????

Personally, I think it’s a bit wrong to imply the German car industry putting profits before people because of this e-fuel thing.

Electrification just doesn’t work for the vast majority of the world. If e-fuels can be cracked, they are going to have significant advantages over electrification, not least because all our fossil fuel cars are going to end up in emerging markets, where they’re not going to be electrifying anything any time soon.

At least not to the extent as the West.

We are finishing up. Frances will be back tomorrow (Thursday) but then everyone is taking a break (unless banks go crazy again). From Thursday onwards, for now at least, we will be back to our normal Monday sessions with Anjuli and co-host only.