Do small banks face a real estate "doom loop"?
Main U.S. indexes now red; FANGs, chips hit harder
Comm svcs weakest S&P 500 sector; energy leads gainers
Dollar, bitcoin dip; gold, crude rise
U.S. 10-Year Treasury yield edges up to ~3.54%
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DO SMALL BANKS FACE A REAL ESTATE "DOOM LOOP"? (1405 EDT/1805 GMT)
It's been a tough month, to say the least, for U.S. banking, particularly small- and mid-sized banks, and some corners of the market are wondering if commercial real estate could be the next cloud on the sector's horizon.
This is primarily because of how intertwined the sector and small banks have become.
According to Capital Economics, commercial property lending makes up about 40% of loans by smaller U.S. banks, while these banks account for about 70% of outstanding loans to the sector.
"In a worse case scenario, it's possible that a 'doom loop' develops between smaller banks and commercial property," analysts at the firm wrote in a note.
As nervous depositors pull their money from smaller banks, these banks may be forced to call in their commercial real estate loans, which would accelerate a downturn in a key part of its asset base, which would feed back into worries about the banks' stability.
Given the renewed focus on risk management, smaller banks have strong incentives to tighten financing for real estate given risks, Danielle DiMartino Booth, CEO and chief strategist for Quill Intelligence and aformer advisor at the Dallas Fed told the Reuters Global Markets Forum.
Commercial property values have been hit primarily as a broad shift to remote work after the pandemic means those spaces aren't as lucrative anymore, with commercial real estate prices down 4% to 5% from their 2022 peak, and Capital Economics predicting a further 18% to 20% decline.
"The banks know the big flashlight is coming their way to be shined on their balance sheets, that's going to cause them to be that much tighter," DiMartino Booth said.
"We should really be paying closer attention to banks that have a really high concentration of these loans because there's losses that are built in."
NO HURRICANE IN SIGHT TO FORCE AGGRESSIVE FED RATE CUTS -GOLDMAN (1330 EDT/1730 GMT)
It's too early to fully know the implications for the U.S. economy of the banking turmoil that has roiled markets, says
Jan Hatzius, chief economist and head of global investment research at Goldman Sachs.
Reduced credit availability will prove to be a headwind that helps the Fed keep growth below potential despite the support from rising real income and better global growth, he says in a note on Monday.
But it's not a hurricane that pushes the economy into recession and forces the Fed to ease aggressively, he says.
However, there's a hard to explain disconnect between a rally in short-term Treasuries and an equity market facing what would appear to be a negative growth shock of unknown magnitude, he says.
The disconnect may reflect expectations tighter credit will mostly hit parts of the U.S. economy that are less visible in public markets but still matter for the monetary policy, such as commercial property and small business, Hatzius says.
This is a difficult environment, not only for policymakers but also for investors, he said.
"We suspect that two less benign explanations - an overly dovish view of the Fed's reaction function and a simple disagreement between equity and rates investors about the growth outlook - also play a role," Hatzius said.
"If so, expected returns on both stocks and bonds are likely to be relatively low," he said in a note that raised Goldman's odds for a potential recession to 35% from 25%, an outlook that is almost half the market's consensus.
SLOWER GROWTH, STICKY INFLATION, STAY DEFENSIVE -NUVEEN (1215 EDT/1615 GMT)
Higher rates are contributing to banking issues and should result in slower growth - at least that's how Saira Malik, chief investment officer at Nuveen, sees the current environment.
According to Malik, over the intermediate term a lower supply of credit to the U.S. economy will lead to slower economic growth, thus increasing the risk of recession.
Meanwhile, she says that a key issue remains inflation which is both elevated and sticky.
"If banking stresses persist or accelerate, that would have a deflationary effect on the economy, making rate hikes less urgent. If banking issues fade, however, the Fed would be under more pressure to increase rates to combat inflation," Malik says in a note.
Turning to portfolio considerations, Malik continues to emphasize defensive positioning across equities and a preference to allocate risk within fixed income.
Carrying this view across the banking sector, Nuveen favors preferred securities over U.S. bank common stock.
Within preferreds, Malik favors $1,000 par over $25 par preferred securities, as they offer more attractive valuations and feature almost one-third less duration. She also thinks the $1,000 par side of the market should be more liquid and less volatile.
Additionally, in the wake of the Credit Suisse takeover, Nuveen remains constructive toward tier-one contingent convertible bonds (AT1 CoCos) issued by non-Swiss European banks. Regulators and central banks governing those areas explicitly recognize AT1 CoCo investors as being senior to common equity investors.
"The recent experience with Credit Suisse has forced spreads wider across the entire AT1 CoCo market, which we believe has created attractive valuations."
SINGIN' IN THE RAIN: CONSUMER CONFIDENCE WARMS AS ECONOMY DAMPENS (1145 EDT/1545 GMT)
A data triple play on Tuesday showed consumer outlook growing sunnier even as hawkish monetary policy continues to make itself felt.
The mood of the American consumer - who bears the weight of 70% of the U.S. economy on his back - has brightened unexpectedly this month.
The Conference Board's (CB) Consumer Confidence index USCONC=ECI rose 0.8 point, from February's upwardly revised print, to land at 104.2, or 3.2 points north of consensus.
Digging into the report, while the majority of respondents see no changes in their spending habits over the next six months, a growing minority plan to spend less, particularly for discretionary categories such as travel, movies and dining out.
"While consumers feel a bit more confident about what's ahead, they are slightly less optimistic about the current landscape," writes Ataman Ozyildirim, CB's senior director of economics. "The share of consumers saying jobs are 'plentiful' fell, while the share of those saying jobs are 'not so plentiful' rose."
That last bit is good news for those scanning the tight labor market - a major inflation contributor - for any evidence that the Federal Reserve's restrictive policies are working as advertised.
More good news can be gleaned from the slight narrowing of the gap between the "current conditions" and "expectations" components.
Data geeks know that a growing chasm between the two is often a harbinger of recession:
Crossing the street to the housing sector, home price growth has cooled to an annual rate that's actually approaching "normal."
The S&P CoreLogic Case-Shiller 20-city composite USSHPQ=ECI continued to contract on a monthly basis in January, dropping a seasonally adjusted 0.4%.
Fifteen of the 20 cities in the composite saw monthly home prices fall.
Year-on-year, the composite dropped an encouraging 2.1 percentage points to 2.5%, the lowest the measure has been since before the onset of the COVID pandemic - specifically, November 2019.
Mortgage rates continued to follow benchmark Treasury yields higher in the first weeks of the year, and along with tighter credit conditions associated with the Fed's assault on inflation have likely resulted in the broad-based price drop.
"The Federal Reserve remains focused on its inflation-reduction targets, which suggest that rates may remain elevated in the near-term," says Craig Lazara, managing director at S&P Core Logic.
"Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months," he said.
City by city, only Miami and Tampa saw double-digit annual increases, while San Francisco, Seattle, San Diego and Portland (Oregon) saw year-on-year decreases.
It should be noted that as indicators go, Case-Shiller is ancient history. More recent housing data suggest the sector has found its basement.
Finally, the Commerce Department released its advance take on goods trade balance and wholesale inventories for February.
The difference between the value of U.S.-made goods exported abroad and foreign goods imported to the United States USGBAL=ECI unexpectedly widened by 0.6% to $91.63 billion last month.
Both imports and exports declined, pointing toward a global softening in demand - a good thing for inflation-watchers.
And the value of goods stacked in the warehouses of U.S. wholesalers USAWIN=ECI edged up 0.2%.
"The contrast with last year is stark, when a period of frantic inventory rebuilding by wholesalers and retailers caused the goods trade deficit to surge at the start of the year, before falling back as many of those same firms suddenly found themselves with overstocked shelves," says Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics.
Wall Street was mixed, with industrials keeping the Dow green and megacap momentum stocks dragging the S&P 500 and the Nasdaq into negative territory.
NASDAQ DIPS, DOW GAINS AS WALL STREET MEANDERS (1025 EDT/1425 GMT)
The S&P 500 .SPX is edging lower and the Nasdaq .IXIC is lower on Tuesday as the potential for slower growth is weighing on the market as data showed the U.S. trade deficit in goods widened last month and signs of an expanding credit crunch are helping to spur recession fears.
Tech .SPLCRT is leading decliners and energy .SPNY is out front of the gainers as a majority of the 11 S&P 500 sectors are positive.
The Dow transports .DJT, small caps .RUT are up, along with value stocks .IVX, while growth .IGX and semiconductos .SOX are down.
The U.S. trade deficit in goods widened modestly in February as exports declined, potentially setting up trade to be a small drag on economic growth in the first quarter after exports added about half a percentage point to growth in the fourth quarter.
U.S. single-family home prices moderated further on an annual basis in January, potentially setting up trade to be a small drag on economic growth in the first quarter.
"Ongoing volatility in mortgage rates and fallout from the banking crisis could put a damper on spring home-buying season, particularly if credit tightening impacts mortgage availability and consumer confidence takes another hit," said Selma Hepp, chief economist at CoreLogic.
David Kelly, chief global strategist at JPMorgan Asset Management, said in a note it's still a close call as to whether the U.S. economy falls into recession this year.
"The recent banking turmoil will likely induce further credit tightening and this, together with the impacts of fiscal drag on consumer spending, falling profits on investment, higher mortgage rates on homebuilding and a high dollar on trade, could well be enough to trigger an economic downturn," Kelly said.
Here is a snapshot of market prices a little more than 30 minutes into the trading day:
U.S. IPO MARKET: NIPPED IN THE BUD (1015 EDT/1415 GMT)
Following the slowest year for new issuance in decades, the first quarter of 2023 continued the trend with 23 IPOs raising $2.2 billion, according to Renaissance Capital.
"Deal flow started at a decent pace but failed to pick back up after the February lull, as hawkish signals from the Fed, renewed recession fears, and turmoil within the banking industry caused a spike in volatility," said Renaissance, a provider of pre-IPO institutional research and IPO ETFs, in its quarterly review
The mix of issuers this quarter has been fairly diverse, although the three largest offerings were all from energy-related companies, Renaissance pointed out.
Eight IPOs raised at least $100 million, led by solar equipment maker Nextracker Inc's NXT.O $638 million deal. And though U.S. IPOs in aggregate have averaged a flat return from issue price, the $100 million-plus deals delivered a "solid 11% gain," per Renaissance.
Coming off its worst year since inception (down 57%), Renaissance noted that its IPO Index rallied 25% through early February, but seesawed from there. Still, its IPO index is on track to finish the quarter up about 11% and is well outperforming the S&P 500 .SPX.
Should market conditions become more accommodative to new issues, Renaissance indicated the IPO pipeline currently has 147 companies on file seeking to raise a total of $14 billion. That includes 105 in the "active pipeline" which have filed or updated their paperwork with the SEC within the last 90 days.
Stable, profitable businesses remain the most likely IPO candidates in the near term, a common theme among the largest names in the queue, Renaissance said.
The firm highlighted Johnson & Johnson's JNJ.N spinoff of its consumer health business Kenvue Inc KVUE.N, which could raise $5 billion, car sharing marketplace Turo Inc TURO.N and Cummins Inc's CMI.N filtration unit Atmus Filtration Technologies Inc among notable offerings in the pipeline.
(Lance Tupper, Chuck Mikolajczak)
"BUY EUROPE" TRADE: DOWN, BUT NOT OUT(0949 EDT/1349 GMT)
When it became clear in 2022 that Europe had dodged an economic recession - at one point the consensus - big money from overseas began flowing into the region's equities, driving a rare outperformance versus the U.S..
Propelled by a big valuation discount, the "Buy Europe" trade climbed to fresh highs in early 2023, but the unpredictable crisis that slammed the banking system on both sides of the Atlantic this month has cast doubts over its upside potential.
Recession warnings popped up again, Fed rate hike bets were reversed and markets suddenly re-discovered their appetite for U.S. tech - the key beneficiary of the secular bull run on Wall Street that stumbled when the Fed stated its hiking cycle.
Does this mean it's game over for Europe's outperformance versus the U.S.? Probably not, at least, according to some investors who spoke to Reuters during the wild days of the latest bank confidence crisis.
"The perception of a shift to cuts by central banks coupled with QE and a quick return to the liquidity-driven environment of the last economic cycle has been driving long-duration stocks like tech. That seems unlikely to last," said Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab.
"Inflation is likely to remain sticky, and as chairman Powell pointed out...: bumpy. The bumps in inflation may change investors perception of how quickly and aggressively central banks cut rates this year. As that gets reassessed by the market, international leadership may continue," he added.
But what about if more banks go belly up?
Kleintop says European banks have high liquidity coverage, deposits have grown until this year and have cash parked with the ECB. And concludes: "Europe dodged an energy crisis this winter and it may dodge a financial one this spring".
Schwab's is not an isolated view.
Luca Finà, head of equity at Generali Insurance Asset Management, says the recent relative pullback is consistent with moves seen over the past year and sees potential for Europe to outperform in the coming weeks and months.
"On valuation ground, China exposure and the macro implications of this banking crisis, I think there is still a gap to be closed in favor of Europe vs U.S.," he said.
Others are morecautious.
Michelle Cluver, Portfolio Strategist at Global X, says Europe's outperformance depended fully on risk sentiment: "I believe the crisis in confidence in the banking system could result in larger shock factors that may shift the focus away from Europe towards quality and areas perceived as safer".
The S&P 500 .SPX is flat so far this month, the Nasdaq 100 .NDX has gained over 5%, while the STOXX Europe 600 .STOXX, which is relatively low in tech exposure, is down around 4%.
NASDAQ COMPOSITE: READY TO BLOOM? (0900 EDT/1300 GMT)
It's been a choppy couple of months for the Nasdaq Composite .IXIC.
However, one beaten-down measure of the Nasdaq's internal strength is suddenly springing to life, suggesting the Composite may be on the verge of a surprise advance:
On Feb. 2, the IXIC rallied to a more than five-month high. From there, the index fell as much as 10% into its mid-March trough, before recovering somewhat. It ended Monday off just 3.5% from that early-February high.
Meanwhile, the Nasdaq new high/new low (NH/NL) index .AD.O topped on Feb. 3 at 79.2%. Last Thursday it had plunged to 13.9%, putting it at a five-month low, while at the same time potentially suggesting the Composite had become washed out internally.
Since the Nasdaq's bear market began in late 2021, this measure has seen numerous troughs between 3.8% and 18%, from which the Composite has been able to launch rally-phases.
The NH/NL index has now turned up and ended Monday at 17%. Bulls will now want to see the 13.9% low hold, and the measure reclaim its descending 10-day moving average (DMA), which ended Monday at 18.4%.
The Nasdaq NH/NL index has ended below its 10-DMA for 32-straight trading days, which is its longest such streak since a 33-trading day period from mid-August to early-October 2020.
FOR TUESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
STOXX vs SPX500https://tmsnrt.rs/3lRB1Tx
IPO performance vs S&P 500https://tmsnrt.rs/3KeDQYc
Early market prices https://tmsnrt.rs/40BPbH4
Goods trade balancehttps://tmsnrt.rs/3lPIGBQ
(Terence Gabriel and Lance Tupper are Reuters market analysts. The views expressed are their own)</body></html>
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