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Your Quiver | Wednesday, March 22, 2023

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

Tuesday’s Tightrope

Overnight international markets were up, driven by positive US markets yesterday and additional progress towards securing global financial systems. Today, US markets look to start the day flat ahead of Powell’s rate announcement and Q&A. As we have experienced in the past two years, markets can move strongly in both directions once he starts going off script. Per NOSO, a Harvard study found that stocks and bonds tended to reverse direction during Powell's press conferences compared with their initial reaction to the Fed’s reports. Nadine Terman of Soletein Capital further points out, aside from the will-they-or-won’t-they 25bps hike today, the updated rate projections (first time since Dec) should be the driving force behind initial moves. The communication surrounding the choice between fighting inflation and causing more bank turmoil is akin to running across a tightrope, in that Powell most likely will fall short of easing everyone’s concerns.

Additional Disclosures

Investors heard from PacWest Bancorp, a Beverly Hills lender, that said it secured $1.4bn in cash from an Atlas SP financing facility and borrowed $3.7bn from the Fed Home Loan Bank System. $10.5bn from the Fed’s discount window, and $2.1bn in Bank Term Funding—to counteract pain when clients drew down another 20% of their deposits. The majority of outflows came from its vc banking segment (thinkin’ of you, SVB). I can only imagine disclosures during the upcoming earnings season for banks.


The incredible rise of trading in derivatives that expire within 24 hours is changing the industry. 0DTE contracts represented 42% of S&P 500’s total options trading volume in March, per BofA data. That compares to 22% one year ago. Investor Matthew Tuttle said it best—“A lot of people are gambling with these and some will blow themselves up, but Wall Street will always provide ways for people to pick up pennies in front of a steam roller if they so choose.” Why are they in such high demand? Very short-term contracts cost less on an absolute basis (although they are not cheap), so some investors use them to hedge around events, others may be doing directional bets, some may be combining them for more complex trades, etc. Given the effect of macro data and events in the past couple of years, traders find them attractive to deal with non-fundamental moves in positions. JPM analyzed the data—the first 10 min of trading 0DTE are the most important, with two-thirds of gains coming in the first minute.

The Next Chapter

Now we’re hearing the the gov may provide direct backing to First Republic to get a deal done, ala UBS/Suisse Miss over in Europe. They may do a lift-out of challenged assets with high unrealized losses, which have been the sticking point to deals so far. Other potential solutions include offering liability protection, giving flexibility to cap rules, and easing ownership stake limits.

Misaligned Spigot

Sounds like a lot of investment firms heavily were using SVB’s capital call lines of credit and partner lending. Basically, it let firms get financing for deals without having to get one-by-one capital call funds from LPs, and it let employees of these firms get a loan to invest in deals, as commonly they are required to invest alongside LPs. Well, you can imagine the due diligence you have to do before getting capital from your LPs is a bit more than what you need when calling up your banker at SVB. According to Nadine Terman, that easy money spigot that created misalignments with client capital looks to be getting turned down, if not off, at various banks.

Sippin' Tea on the Porch

Nadine Terman mentions that although the S&P has generated a positive return month-to-date, the day session has been where the action is. It drove an aggregate gain more than that for the entire month. The delta between day and night performance, along with various short-term positioning metrics pointing to oversold signals, suggest that most investors are still sitting on the sidelines, watching the high frequency algorithms duke it out. The algos don’t typically care whether the market is going up or down, so they can just push their trades and put pressure on market moves. Thus, we’d be careful assigning fundamental reasons for moves until the folks sippin’ tea on the porch get back to investing.