InvestMacro

By JustMarkets

Concerns about problems in the banking sector are easing. The US First Republic Bank (FRC) shares jumped about 30% yesterday after US Treasury Secretary Yellen said the US government would be willing to step in and support smaller banks. Other regional banks also rose sharply on the news. At the close of the stock market yesterday, the Dow Jones Index (US30) Increased by 0.98%, and the S&P 500 (US500) added 1.30%. The NASDAQ Technology Index (US100) gained 2.06%.

The Federal Reserve is expected to raise interest rates by 0.25% today, despite concerns about stress in the banking system. Investors are also waiting for the Fed to reassure them that regional bank problems will be solved. Analysts believe Fed Chairman Jerome Powell will indicate at the press conference that the Fed is fighting inflation by raising rates and then assure markets that the central bank can use other tools to preserve financial stability. If Powell’s press conference speech is dovish and hints at an end to the cycle soon, it will cause the dollar index to fall and stock indices to rise. But if Powell hints that the Fed will continue to tighten policy at future meetings, it could cause another panic rush, which would cause investors to buy dollars again.

ExxonMobil Corp (XOM) shares rose more than 4% after Morgan Stanley expressed optimism about the oil company, citing its “competitive positioning.” Tesla’s (TSLA) stock rose sharply yesterday. The company was supported by retail sales data from China Merchants Bank International, suggesting the automaker will report strong sales in the first quarter.

Cathie Wood, founder, and CEO of ARK Investment Management told Bloomberg TV on Tuesday that her company has more than $2 billion in losses from stock sales during the market crash. Cathie Wood explained that her fund reduced its holdings from more than 50 to just 28 shares. Selling stocks at a loss to offset portfolio gains is a popular strategy investors use during market downturns to cushion the impact.

European stock indices rose on Tuesday. Germany’s DAX (DE30) gained 1.75%, France’s CAC 40 (FR40) jumped by 1.42%, Spain’s IBEX 35 (ES35) added 2.45%, and the British FTSE 100 (UK100) closed yesterday up by 1.79%.

Years of massive expansion have accumulated a staggering €4 trillion of idle liquidity in the pockets of eurozone banks. Until this stockpile of cash disappears, the ECB can only raise rates by subsidizing the deposits it receives from banks. According to analysts, this is a dangerous course. The assets the central bank holds against these deposits generate returns far below the cost of funding. Calculations by Daniel Gros, a senior fellow at the Center for European Policy Research, show that this is enough to wreck the accounts of the ECB and its constituent national central banks in the coming years. The ECB has begun reducing its investments in securities at a rate of 15 billion euros a month, but this is not enough. All other things being equal, it would take about 27 years to reabsorb all liquidity. The ECB, therefore, urgently needs to launch new tools to get rid of liquidity.

Despite encouraging signs that inflationary pressures are easing, analysts believe the Bank of England is likely to go for a final 25bp hike on Thursday, although this will certainly depend on what happens in financial markets and what the latest inflation data are today. A calmer financial market backdrop would support at 25 basis point hike. Further volatility could easily lead to a “no change” decision, with an evasive indication that further hikes could be taken if things change.

A survey of economists on Tuesday indicates that the Swiss National Bank (SNB) is expected to raise its discount rate by 50 basis points to 1.5%, even though the SNB agreed last week to lend a whopping 50 billion Swiss francs ($54 billion) to troubled local lender Credit Suisse, which UBS then bought out on Monday in a deal struck by local regulators. The US crude inventories rose for a second straight week despite expectations of a decline. The American Petroleum Institute reported that inventories rose by 3.2 million barrels. The US government’s Energy Information Administration will release its oil stockpile data today. Falling inventories will push oil prices higher and vice versa.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) was not trading because of the holiday, China’s FTSE China A50 (CHA50) gained 1.36%, Hong Kong’s Hang Seng (HK50) gained 1.36% on the day, India’s NIFTY 50 (IND50) added 0.70%, and Australia’s S&P/ASX 200 (AU200) was up by 0.82%.

S&P 500 (F) (US500) 4,002.87 +51.30 (+1.30%)

Dow Jones (US30)32,560.60 +316.02 (+0.98%)

DAX (DE40) 15,195.34 +261.96 (+1.75%)

FTSE 100 (UK100) 7,536.22 +132.37 (+1.79%)

USD Index 103.30 −0.40 (−0.39%)

• – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
• – UK Producer Price Index (m/m) at 09:00 (GMT+2);
• – Eurozone ECB President Lagarde Speaks at 10:45 (GMT+2);
• – US Crude Oil Reserves (w/w) at 16:30 (GMT+2);
• – US FOMC Economic Projections at 20:00 (GMT+2);
• – US Fed Interest Rate Decision at 20:00 (GMT+2);
• – US FOMC Statement at 20:00 (GMT+2);
• – US FOMC Press Conference at 20:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Cassandra Jones Havard, University of South Carolina 

“Moral hazard” refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages.

The concept describes financial recklessness. It has its roots in the advent of private insurance companies about 350 years ago. Soon after they began to form, it became clear that people who bought insurance policies took risks they wouldn’t have taken without that coverage.

Here are some illustrative examples: Having worker’s compensation insurance could potentially encourage some workers to stay out of work longer than needed for their health. Or, homeowners insurance may explain why a homeowner might not bother spending their own money on a small repair not covered by their insurance policy because they figure that over time it will turn into a larger problem that would be covered.

Or think of what happens when someone rents a car and parks it where it can easily be damaged. That carelessness reflects an assumption that the rental car company’s insurance policy will pay for the repairs.

Why moral hazard matters

U.S. banks are insured by the Federal Deposit Insurance Corporation, or FDIC, and the risk-takers are both banks and the bank’s depositors.

Congress established the FDIC during the Great Depression, which began with a spate of bank runs. The goal was to boost confidence in the banking system.

The Dodd-Frank Financial Reform Act, enacted after the 2008 financial crisis, was supposed to reduce moral hazard. One way it did that was by making it clear that accounts of more than US$250,000 aren’t insured by the FDIC unless the bank’s failure presents a systemic risk to the financial system.

The implicit assumption behind the government’s insurance limit, which prior to 2008 stood at $100,000, is that depositors who have accounts worth more than the limit will bear the loss of bank failure along with the bank’s executives and shareholders. Yet boosting the size of the guarantee amount also made future bank bailouts more costly, which in turn increased moral hazard.

And when Silicon Valley Bank failed in March 2023, all its depositors got access to their funds – including those with accounts that exceeded the $250,000 limit – because the government made an exception.

‘Too big to fail’

I teach and write about moral hazard in the banking industry
as a banking law professor. As it happens, my banking law class had discussed moral hazard and bank failure for three class sessions held before the 2023 spring break.

When the students returned from their vacation, news of Silicon Valley Bank’s failure appeared to be the start of what might become a bank crisis.

“What happened? It’s completely different from what you taught us!” the students in my class exclaimed, almost in unison. Questions tumbled from their heads demanding an explanation.

Why did the government apparently throw out concerns about moral hazard when SVB failed?

Any explanation would have to begin with what moral hazard can mean in the context of banking, which can summon the colloquial phrase “too big to fail.”

That controversial concept applies to how the government responds in the aftermath of the risky behavior of a bank – if the collapse of the bank is likely to harm the economy. Yet, in reducing the risk of a widespread financial crisis, the government can end up sending the message that it’s willing to protect banks that engage in reckless behavior – and to shield their customers from the consequences.

About the Author:

Cassandra Jones Havard, Professor of Law, University of South Carolina

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior

Investors are ready to build their investment portfolios with new money amid a growing consensus that looser monetary policies are coming which will boost financial markets, says the CEO of one of the world’s largest independent financial advisory and asset management organisations.

This assessment from Nigel Green of deVere Group comes ahead of critical policy meetings this week at the US Federal Reserve and Bank of England.

It also follows the Fed and five other major central banks announcing, in a coordinated joint statement, fresh measures to improve global liquidity. The central banks said the move served as an “important backstop” to ease strains in global funding markets.

He comments: “Global markets remain jittery from the turmoil caused by the fallout of the crises hitting Silicon Valley Bank, Signature Bank, Credit Suisse and First Republic Bank.

“There are fears of runs on other banks as other lenders could find themselves in trouble after rises in interest rates left some harbouring major losses.”

The deVere CEO continues: “The coordinated action being taken by the US Federal Reserve, the Bank of England, Bank of Japan, Bank of Canada, the European Central Bank and Swiss National Bank launched on Monday to keep credit flowing in the serious issues affecting the banking sector, show that they are willing to do whatever it takes to avert a crash.

“Investors are taking this as a sign that central banks will now ease off interest rate hikes.

“Looser monetary policies will trigger a surge in financial markets.

“Not wanting to miss out on the next rally, clients are now telling our consultants around the world that they want to build-up their investment portfolios with new money.”

Looser monetary policy increases liquidity in the markets, stimulates economic activity, and boosts investor confidence, all of which can contribute to higher stock prices.

The next Federal Open Market Committee (FOMC) meeting is scheduled for March 21 and 22. The US Fed rate hike decision will be announced on March 22 at 2 pm (ET) followed by a press conference.

Meanwhile, the Bank of England will meet on Thursday and hold a press conference at noon in London.

“Central banks have the unenviable task of trying to cool stubbornly high inflation and restore financial stability,” says Nigel Green.

He concludes: “It seems that investors are gripped by the Fear Of Missing Out. They’re looking past interest rate hikes and assuming that the chaos in the banking sector will unleash looser monetary policies from central banks, which will be fuel for the markets.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

By JustMarkets

At the close of the stock market yesterday, the Dow Jones Index (US30) gained 1.20%, and the S&P 500 Index (US500) increased by 0.89%. The NASDAQ Technology Index (US100) added 0.32% yesterday. The US Federal Reserve said late last week that it would work with other major central banks to provide liquidity to the global banking sector. Certainly, this has brought some optimism back to the stock market. But that could easily dissipate if the US Federal Reserve raises interest rates on Wednesday and hints at further policy tightening.

Former Goldman Sachs chief executive Lloyd Blankfein said the Federal Reserve might take a pause in raising interest rates this week as the unfolding banking crisis tightens lending standards in the economy. Blankfein also warned that without intervention to protect deposits at small and regional banks, consumers could only rely on large banks that have high capital and liquidity standards. This, he said, could lead to consolidation in the financial sector, which would negatively impact the nation’s large and growing economy. Before the SVB collapse and the resulting policy implications, the Fed was willing to raise rates by as much as 50 basis points as price pressures in the US economy were deemed sustainable. Given the current market volatility, some Fed observers expect a quarter-point hike, while others predict a pause.

Shares of the New York Community Bancorp jumped by more than 31% after his subsidiary Flagstar Bank agreed to buy most of Signature Bank for $2.7 billion. Concerns about the banks’ liquidity crisis subsided somewhat Monday when Swiss investment bank UBS said it would buy Credit Suisse, and JPMorgan (JPM) appeared to have made progress in rescuing First Republic Bank (FRC) following last week’s federal takeover of regional banks Silicon Valley and Signature.

European stock indexes rose on Monday amid improving sentiment in the banking sector after UBS agreed to buy struggling rival Credit Suisse. German DAX (DE30) gained 1.12%, French CAC 40 (FR40) jumped by 1.27%, Spanish IBEX 35 (ES35) gained 1.31%, and British FTSE 100 (UK100) closed yesterday with a 0.93% gain.

To further improve financial stability in Europe, European Central Bank President Christine Lagarde said that the central bank is “ready to respond as necessary” to maintain the stability of the euro area.

Gold prices have finally reached the $2,000 per ounce mark. Falling dollar index and falling government bond yields amid the banking crisis are fueling gold’s rise. But analysts are confident that traders should expect a correction wave in the coming days because prices are heavily overbought now.

Crude markets tried to rebound yesterday after regulatory measures to shore up liquidity and consolidate weak players in the banking sector helped ease some fears of an impending crisis. But that was largely offset by uncertainty ahead of this week’s key Fed meeting. Asian markets mostly fell Monday. Japan’s Nikkei 225 (JP225) decreased by 1.42%, China’s FTSE China A50 (CHA50) lost 0.41% for the day, Hong Kong’s Hang Seng (HK50) lost 2.65% for the day, India’s NIFTY 50 (IND50) decreased by 0.65%, and Australia’s S&P/ASX 200 (AU200) was down by 1.38%.

On Monday, the Bank of Japan appointed Seiichi Shimizu, whose market and technical expertise in the bank’s Yield Curve Control (YCC) policy has earned him the nickname “Mr. YCC. During his tenure as head of the financial market division, the 57-year-old banker helped put together a package of steps to mitigate the side effects of the YCC in 2021, such as phasing out large purchases of risky assets. Shinichi Uchida was elected deputy governor. The new governor, Kazuo Ueda, will join the Bank of Japan when the term of incumbent Haruhiko Kuroda expires next month. Many analysts expect the Bank of Japan to change or cancel the YCC during Ueda’s five years in office, as the bank’s huge bond purchases to protect the yield cap have been criticized for distorting the shape of the yield curve and depleting bond market liquidity.

S&P 500 (F) (US500) 3,951.57 +34.93 (+0.89%)

Dow Jones (US30)32,244.58 +382.60 (+1.20%)

DAX (DE40) 14,933.38 +165.18 (+1.12%)

FTSE 100 (UK100) 7,403.85 +68.45 (+0.93%)

USD Index 103.30 −0.40 (−0.39%)

• – Australia RBA Meeting Minutes at 02:30 (GMT+2);
• – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Canada Consumer Price Index (m/m) at 14:30 (GMT+2);
• – Eurozone ECB President Lagarde Speaks at 14:30 (GMT+2);
• – US Existing Home Sales (m/m) at 16:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By ForexTime

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

By Robert Lempert, Pardee RAND Graduate School and Elisabeth Gilmore, Carleton University 

It’s easy to feel pessimistic when scientists around the world are warning that climate change has advanced so far, it’s now inevitable that societies will either transform themselves or be transformed. But as two of the authors of a recent international climate report, we also see reason for optimism.

The latest reports from the Intergovernmental Panel on Climate Change, including the synthesis report released March 20, 2023, discuss changes ahead, but they also describe how existing solutions can reduce greenhouse gas emissions and help people adjust to impacts of climate change that can’t be avoided.

The problem is that these solutions aren’t being deployed fast enough. In addition to pushback from industries, people’s fear of change has helped maintain the status quo.

To slow climate change and adapt to the damage already underway, the world will have to shift how it generates and uses energy, transports people and goods, designs buildings and grows food. That starts with embracing innovation and change.

Fear of change can lead to worsening change

From the industrial revolution to the rise of social media, societies have undergone fundamental changes in how people live and understand their place in the world.

Some transformations are widely regarded as bad, including many of those connected to climate change. For example, about half the world’s coral reef ecosystems have died because of increasing heat and acidity in the oceans. Island nations like Kiribati and coastal communities, including in Louisiana and Alaska, are losing land into rising seas.

Other transformations have had both good and bad effects. The industrial revolution vastly raised standards of living for many people, but it spawned inequality, social disruption and environmental destruction.

People often resist transformation because their fear of losing what they have is more powerful than knowing they might gain something better. Wanting to retain things as they are – known as status quo bias – explains all sorts of individual decisions, from sticking with incumbent politicians to not enrolling in retirement or health plans even when the alternatives may be rationally better.

This effect may be even more pronounced for larger changes. In the past, delaying inevitable change has led to transformations that are unnecessarily harsh, such as the collapse of some 13th-century civilizations in what is now the U.S. Southwest. As more people experience the harms of climate change firsthand, they may begin to realize that transformation is inevitable and embrace new solutions.

A mix of good and bad

The IPCC reports make clear that the future inevitably involves more and larger climate-related transformations. The question is what the mix of good and bad will be in those transformations.

If countries allow greenhouse gas emissions to continue at a high rate and communities adapt only incrementally to the resulting climate change, the transformations will be mostly forced and mostly bad.

For example, a riverside town might raise its levees as spring flooding worsens. At some point, as the scale of flooding increases, such adaptation hits its limits. The levees necessary to hold back the water may become too expensive or so intrusive that they undermine any benefit of living near the river. The community may wither away.

The riverside community could also take a more deliberate and anticipatory approach to transformation. It might shift to higher ground, turn its riverfront into parkland while developing affordable housing for people who are displaced by the project, and collaborate with upstream communities to expand landscapes that capture floodwaters. Simultaneously, the community can shift to renewable energy and electrified transportation to help slow global warming.

Optimism resides in deliberate action

The IPCC reports include numerous examples that can help steer such positive transformation.

For example, renewable energy is now generally less expensive than fossil fuels, so a shift to clean energy can often save money. Communities can also be redesigned to better survive natural hazards through steps such as maintaining natural wildfire breaks and building homes to be less susceptible to burning.

Land use and the design of infrastructure, such as roads and bridges, can be based on forward-looking climate information. Insurance pricing and corporate climate risk disclosures can help the public recognize hazards in the products they buy and companies they support as investors.

No one group can enact these changes alone. Everyone must be involved, including governments that can mandate and incentivize changes, businesses that often control decisions about greenhouse gas emissions, and citizens who can turn up the pressure on both.

Transformation is inevitable

Efforts to both adapt to and mitigate climate change have advanced substantially in the last five years, but not fast enough to prevent the transformations already underway.

Doing more to disrupt the status quo with proven solutions can help smooth these transformations and create a better future in the process.

Editor’s note: This is an update to an article originally published April 18, 2022.

About the Author:

Robert Lempert, Professor of Policy Analysis, Pardee RAND Graduate School and Elisabeth Gilmore, Associate Professor of Climate Change, Technology and Policy, Carleton University

This article is republished from The Conversation under a Creative Commons license. Read the original article.