Equities gain, bonds confused, as Fed meets

Bank stocks had a volatile session on Monday. UBS lost up to 16% after the Credit Suisse deal but closed the session more than 1% higher.

In the US, JP Morgan, Goldman Sachs and Morgan Stanley closed the day with 1 to 2% of gains. The regional US banks also had a calm session, except for the First Republic Bank - which plunged 47% after a second credit downgrade in just a week from S&P.

JP Morgan is reportedly in talks with other leading banks to do more, after big US banks put a combined $30 billion in the First Republic Bank as a show of support last week.

In bonds, the announcement of full write-down of Credit Suisse’s AT1 bonds got bond investors confused, as equities should be written down before any other paper in the ‘bonds’ category. Authorities said that equities will be written down first to end confusion. JP Morgan and Morgan Stanley said that they are willing to buy CS’s AT1 bonds for 2 cents to sell them back ‘somewhere’ for 5 cents.

The BoFA’s implied bond volatility index MOVE is lower than last week’s peak but is still at the highest levels since 2007/2008 subprime crisis.

Equity traders, however, are focused on waning bank stress; the S&P500 closed the day 0.89% up, as Nasdaq 100 gained 0.34%.

Fed meets

The Federal Reserve (Fed) begins its two-day policy meeting today in the middle of a storm.

If the European Central Bank (ECB) decision serves as a cheat sheet, the Fed could hike by 25bp and say that it has tools to inject liquidity in the system to contain crisis.

Investors are also focused on what the Fed will do with the Quantitative Tightening (QT). I don’t think that the Fed will reverse its balance sheet unwinding strategy, or to pause it – because the crisis intervention is a tactical and a short-term move, while the Fed’s huge $8.6 trillion balance sheet must be unwound sooner rather than later.

In this context, the Fed’s balance sheet ticked higher since the SVB collapse, but the Fed members couldn’t comment on the latest events, because the trouble hit the fan while they were in their pre-Fed quiet period.

As a result, all the comments that have not been made since the SVB collapse will come out from Fed Chair Jerome Powell’s mouth, and the March dot plot tomorrow after the decision.

This morning, activity on Fed funds futures assesses a 75% chance for a 25bp hike. This probability tipped a toe below 50% yesterday.

In the FX, the US dollar index slipped below the 50-DMA yesterday on expectation that the Fed will stay cautious at this week’s meeting given the turmoil across the financial place.

Gold traded above the $2000 psychological mark on Monday, but the price of an ounce is back to below $1980 this morning, thanks to the calming nerves regarding the price action on the banks front. A further improvement in sentiment could rapidly pull the price of an ounce to $1900 mark.