Asia open: Order has been restored for now

US stocks are trading higher again Tuesday as risk appetite appears to be returning amidst receding volatility around bank stocks, at least for the time being, and ahead of Wednesday's schedule statement from the FOMC.

Treasury yields are also up sharply today -- yields on 2-year Notes are up a 21bp to 4.18% -- seemingly reflecting the relaxing financial tensions. But the rise in yields also may indicate that markets expect that the potential disruption to the economy we have seen over the past 2 weeks will not likely derail growth enough to suppress inflation, which could be next week's problem, mainly if the Fed sticks to there inflation-fighting guidance by delivering a hawkish 25 bp hike.

But the unmistakable positive take for today is that higher bond yields clearly indicate recession bets are easing - all pro-cyclical sectors are leading the S&P 500 higher today. The pro-cyclical trade is also getting a bit of a boost from a robust February Existing Home Sales report -- +14.5%

On both sides of the pond, the rapid and enormous official coordinated actions by layering multiple levels of soothing crisis intervention balm across multiple jurisdictions saw the market's ultimate fear gauge, the VIX, having its biggest two-day plunge since May, which tends to draw systematic models back to the tape. When taken together with the genuinely stunning drop in front-end yields, before they repriced higher today's Fed hike probabilities, ample kindling triggered that short-covering bounce across all corners of capital markets, allowing investors to start dipping their toes back in the markets.

With S&P 500 well in the green and implied volatility falling below where it was marked before this storm hit, the pattern suggests the market has compartmentalized chiefly, if not cauterized, stresses in the banking sector.

Given the recovery in cross-asset sentiment, today's FOMC statement has become even more critical. The market has dramatically increased its odds of a rate hike at today's meeting; the next question could be how quickly this year's cuts get priced out of the curve.

While it is odd that we are talking about a rate hike as good news, it genuinely is in the context of panic mode that has griped the market over the past week, as it is the clearest signal that some semblance of order has returned to markets.

That said, the recent stress in the banking sector has fueled growing concern about spillover effects on the commercial real estate (CRE) industry, especially in the office property sector, which could be the next domino to fall due to the rapid ascendancy of US interest rates.

With nearly 6 trillion commercial lending paper sitting like a dead weight on bank balance sheets. The sector continues to face a confluence of post-pandemic challenges, including falling occupancy rates, declining real estate value and, more recently, rising defaults. Coupled with higher funding costs, and tighter lending standards, this implies a challenging fundamental backdrop in upcoming months.

Focus has turned to the CMBX indices – a family of CDS indices referencing commercial mortgage-backed securities (CMBS) – which provide investors with an effective way to express relative value views within the various sub-sectors of the CRE market: office, retail, industrial and apartment properties.

Liquidity is a considerable problem in 2-year treasuries as risk management teams are still hovering over bond and CDS desks. Less liquidity and increased volatility, especially on that tenor, go hand in hand, and that is something to remember if "I-told-you-so" hits the CMBX tape next week.

We are still in the thralls of the unavoidable consequence of a previous "mistake": letting inflation run too hot. In the current context, it is hard not to argue that the policy mistake was to ignore that disproportionate coordinated monetary (AIT) and fiscal policies (covid stimulus) are the textbook way of generating runaway inflation.