The various lifelines being given to financial institutions matter a lot. Underwater positions in portfolios only hit capital accounts if a bank has to sell the positions. Otherwise, the hit on earnings is spread over time. They would have to sell the positions if deposit withdrawals are too high and require it. The lifelines are meant to incentivize banks to keep their assets even if withdrawals get big. Collateral is priced at face value, so a bank can borrow $100 even if the asset is priced at $90. Although the Treasury put up $25bn, the Fed can lever that amount by a lot, so the program is huge.
That’s the question investors are asking about the Fed’s potential hike….versus two weeks ago when the question was—50 bps or 25 bps. While 50 bps is probably off the table at this point, because the Fed/gov stabilized the system, we believe that 25bps is still on the table (currently priced at <50%).
A lot going on here. The 3mo-10mo curve inverted another 30bps overnight. This suggests investors agree with our 0-25bps expectation as recession risks are being priced in quicker due to the unknown impacts of aggressive tightening. 2-yr UST yields dropped -50bps+, set for the greatest daily drop in decades.
One of our brokers is explaining how current moves feel very technical in nature, as systematic strategies are driven by inputs that have moved a lot (e.g., VIX, technical levels on indexes being broken).
Investors are more overweight semis than s/w than at any point in the last 5 years. Because s/w is a longer duration play, and semis are the cyclical play, it may make sense to look at going long s/w and short semis.
Brent declined below $80 for the first time since early Feb after the collapse of SVG added further turbulence in energy markets. Gold extended gains as investors flocked to havens. Other precious metals also advanced.
If you’ve had gold positions like us, we will be watching whether or not to trim/sell based on technical signals. As we have seen so many times, investors freak out and put money into safe havens, but that doesn’t last forever.