Talk of the SVB Financial (SIVB) failure becoming a potential systemic event for the market is growing.
The 2-year Treasury yield (US2Y) (SHY) tumbled 31 basis points on Friday to 4.59% and is down half a percentage point in two sessions. That’s the biggest drop since 2008 and can’t be attributed just to slightly-lower-than-expected average hourly earnings in February.
While systemic contagion speculation may be getting way ahead of the facts (“Just seen SVB being described as a ‘Lehman moment … give me strength … hyperbole gone into overdrive here … decent sentiment indicator,” TraderX analyst Michael Brown tweeted.), it only takes one catalyst to trigger a economy-altering event. And there are plenty of potential ones, according to BofA strategist Michael Hartnett.
One year ago the fed funds rate was at 0% and the yield curve (TBT) (TLT) (SHY) was 40 basis points steep (now 4.5% and 100 bps inverted). Since then there have been 290 global rate hikes, which is not a prelude to a Goldilocks scenario, but a prelude to a “hard landing and credit events,” Hartnett said in his weekly “Flow Show” note.
There is already the appearance of a credit event in tech (XLK) (XLC) and healthcare (XLV) venture capital and private equity lending, Hartnett wrote.
That area looks even more rocky in the wake of SVB.
Other catalysts include government debt, shadow banking and private equity, crypto, speculative tech, real estate, CTAs, collateralized loan obligations and mortgage backed securities, Hartnett said.
There are “so many potential catalysts for (a) systemic deleveraging event that sparks policy panic/end of Fed tightening; truth is source of event irrelevant (who named UK gilts as credit event of ’22), simply that it will happen and will cause policy makers panic (BoE restarted QE last Oct) and investors must be ready at that moment to deploy cash in new leadership assets which outperform in era of higher inflation,” he said.
Currently the stock market is like a “mad donkey,” according to one trader and there are “bad ‘crashy vibes of March,'” Hartnett said.
The “S&P500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) in neurotic 3.8-4.2k trading range driven by dependence on data-dependent Fed,” Hartnett said. That ends once the data is “unambiguously recessionary (e.g. negative US payroll >-200k) and yield curve steepens.”
If oil (USO) (BNO), HY (HYG) (JNK), chips (SOXX) (SMH), banks (KBE) (BKX) and EM (EEM) catch a bid, the S&P heads toward 5,000, but if not it heads to 3,000, he said.
See stocks susceptible to the Wealth Effect.
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