As March Madness appears to be stabilizing, to my eye, this could eventually move into a story of the degradation of forward earnings power as opposed to the creditworthiness issue. Still, it’s hard not to be concerned about the medium-term availability of bank lending in the real economy. I think this is a new challenge that investors may have to navigate, and how the "real economy" adapts to that has yet to be seen. But, for now, it seems investors agree the patchwork of government lending facilities should help prevent an acute banking crisis.
The policy response to date has been to demonstrate that even uninsured deposits are safe by covering all deposits in the two recent major bank closures and increasing liquidity to banks to handle deposit outflows in the event they occur despite regulators’ efforts to reassure depositors.
Even though the plumbing sprung a leak and the foundation revealed a genuine crack, the resilience in stock markets is truly astounding. For now, markets are pricing in a large but craggy hit to growth primarily focused on small businesses. And the S&P 500 has absorbed this negativity well because most of its market cap is concentrated in businesses away from these stress points -- like Tech and large corporations. But no matter what happens, I suspect investors will have difficulty disagreeing with an up-in-quality bias.
The oil market turned excessively pessimistic due to a possible US credit impingement. But prices should recover well in most of the current growth scenarios unless there is an unlikely economically damaging US credit crunch, which would most likely turn global.
But after a VAR shock, it could be a slightly longer road to Brent $90 than we had expected in Q2. Still, with volatility easing, it should allow bullish fundamentals to better compete with headline stress.
Today, oil prices are trading higher into the New York open as broader risk gauges stabilize ( Gold lower, USDJPY higher). This is a good sign, especially after traders noted the steep fall in open interest in the OIL futures markets.
A few things that could limit the upward move in the NY session:
The China-brokered deal between Saudi and Iran has reduced the chances of terrorist-linked supply disruption and dramatically decreased the geopolitical risk premium continuously embedded in the Middle East crude prices.
China's industrial profits contracted 22.9% in the first two months of 2023 compared to a year ago, indicating that factories are yet to fully come out of the Covid-induced slump. So, oil traders will remain somewhat cautious about China's consumption recovery strength.
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