Beginning of the end for the bear market?
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BEGINNING OF THE END FOR THE BEAR MARKET? (1158 GMT)
U.S. regulators and the Federal Reserve stepping-in to shore up confidence in the banking system following the collapse of three banks should not be mistaken as quantitative easing, but it does represent "the beginning of the end of the bear market", says Morgan Stanley.
"The focus should be on the more likely deterioration in growth due to the incrementally restrictive lending/credit environment," said MS chief equity strategist Michael Wilson, referring to 450 basis points of hikes undertaken by the Fed since last March.
"We think this is exactly how bear markets end — an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time. In this case, it's the fact that earnings growth expectations are much too high."
As investors pour into tech stocks, Wilson also warns against the view that mega-cap tech is immune to such concerns.
Tech stocks globally saw a fourth straight week of inflows in the week to March 15, according BofA Global Research, while Barclays noted that U.S. equity inflows for last week were led by the tech sector.
That left the Nasdaq .IXIC up 4.4% for the week, versus just a 1.4% gain for the S&P 500 .SPX while the Dow .DJI ticked lower.
The risk/reward for U.S. equities will remain unattractive until the equity risk premium for the S&P 500, which MS notes is currently at around 230 basis points, moves up to at least 350-400bps, as it would then imply that markets are starting to realize that earning expectations are too high.
(Susan Mathew and Aniruddha Ghosh)
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BANKS DRAG ON STOXX BUT UTILITIES, MINERS PROVIDE RELIEF (0928 GMT)
The STOXX 600 .STOXX fell at the open before erasing some earlier losses, but has since recovered some of those early losses and is down 0.4% on the day.
Banks .SX7P and financial services .SXFP are, unsurprisingly, the biggest losers on a sector basis in Europe at the open, last down 3.3% and 3.4% respectively.
Utilities and miners are being favoured today, with utilities .SX6P up 0.9% and basic resources .SXPP rising 0.5%. The likes of Terna TRN.MI is up 3.2% while Anglo American .AAL.L and Rheinmetall RHMG.DE are up 2%-2.8%.
UBS Group UBSG.S shares are down 9.2% after Sunday's state-backed takeover of rival Credit Suisse CSGN.S.
(Lucy Raitano)
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EUROPEAN FUTURES FLASH RED AS CRITICAL OPEN APPROACHES (0731 GMT)
European futures are flashing red, in the aftermath of an unprecedented weekend that saw the historic state-backed rescue of Credit Suisse CSGN.S by UBS UBSG.S and a coordinated central bank effort to bolster the flow of cash around the world.
Eurostoxx 50 futures STXEc1 are down 1.3% -having earlier fallen as much as 2% -while FTSE 100 FFIc1 futures contracts are down 1.2%and German DAX FDXc1 futures are 1.2%lower.
Credit Suisse shares fell 61.95% in Julius Baer pre-market trading.
There was relief after the 3 billion Swiss francs ($3.23 billion) deal orchestrated by Swiss regulators on Sunday, but market focus has quickly shifted to the massive hit some Credit Suisse bondholders would take under the UBS acquisition.
"We think it is the fact that shareholders have essentially been bypassed in the UBS/CS merger and the fact that AT1 has been bailed in is weighing on markets," wrote RBC Capital Markets strategists in an early note on Monday.
Barclays announced a downgrade to European banks from positive to neutral saying "recent events again go to show how fragile the banking system can be, even though regulation has increased several fold since the Global Financial Crisis."
(Lucy Raitano)
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INVESTORS ADOPT THE BRACE POSITION AS BANKS TOPPLE (0712 GMT)
During the last big banking crises, an analyst was asked by a TV anchor what position he would recommend for investors? "Fetal" was his terse answer.
That pretty much sums up the reaction in Asian markets to the extraordinary government-engineered takeover of the storied Credit Suisse by UBS, along with a U.S. dollar supply operation by a Fed-led posse of major central banks. Incidentally, the BOJ's US$ tender today found no takers, suggesting there's no dollar drought in Asia as yet.
Investors seem torn between relief that Credit Suisse was not allowed to collapse or worries that it had to be saved in such a way in the first place. That worry about who might be next has greatly limited the risk-on rally, with U.S. stock futures and sovereign bond yields up only slightly.
It's not helping that Credit Suisse shareholders are taking a nasty haircut in the deal, though not as painful as AT1 bond holders who seemingly won't get their $17 billion back.
That's a break with convention that could threaten the future of the entire $275 billion CoCo market. Interestingly, Goldman Sachs is reportedly setting up a claims market for the debt, so there must be a chance market pressure - or lawsuits - will soften this ruling.
Volatility is still very much here, as two-year Treasury yields started at 3.90%, jumped to 4.03% only to come all the way back to 3.88%. Rates will no doubt have changed again by the time this sentence ends.
It's not helping that speculators were super short of Treasuries into this event and must be sitting on huge paper losses and the market can't correct properly until these are cleared out.
Likewise, Fed fund futures fell, rose, then fell again as investors dared to divine what all this might mean for interest rates. Right now, futures have a two-in-three chance the Fed hikes by 25bp on Wednesday, but then it's all downhill with 75-100bp of easing implied by year-end.
The Bank of England also meets this week and markets are split on whether it pauses or goes 25bp. Note, in both cases it might be really hard to re-start hikes once you have paused, so markets would take it as an end to the whole cycle, whether policymakers want that or not.
Oddly, the market still thinks the SNB will hike borrowing costs by 50bp at its meeting on Thursday, just a few days after providing more than 160 billion francs in loans and guarantees to the new UBS grouping. No disconnect there.
Key developments that could influence markets on Monday:
- Introductory statement by Christine Lagarde, ECB President, at a hearing of the European Parliament in Brussels – 1400 GMT
(Wayne Cole)
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