Oh what a week! The Four Seasons hit might seem a bit upbeat for the occasion of a banking crisis, but the market has at least got its mojo back in the last few days. Early last week a much-awaited inflation gauge in the US confirmed that inflation remained ‘sticky’, and that the pace of increases might even be accelerating again. For the second week in a row a hawkish and normally market moving Fed speech that should have seen yields go higher was overshadowed by events in the banking sector that had exactly the opposite effect. Just as markets started to digest the news on inflation, Moody’s started downgrading US regional bank ratings, and then the Saudi National Bank appeared to waver in its support for the beleaguered Credit Suisse investment bank. The banking crisis had now gone large, but the Swiss National Bank (SNB) moved quickly to backstop Credit Suisse with a $54bn loan. Markets still weren’t that impressed, and then the ECB chose to make a statement that fighting inflation with tighter interest rates (up 0.5% in Europe last week) was still coherent with fighting off banking crises with the provision of liquidity (which normally amounts to looser monetary policy). By the end of last weekend, the SNB had moved to cauterise the Credit Suisse situation by forcing UBS to buy its stricken compatriot. That seems to have done the trick and calmed markets, although equity markets have been surprisingly resilient and were only down a few percent at their worst, and most are now just flat for the month to date (and thus still in the green since the start of the year).

As one might expect, sector level returns were quite polarised, reflecting a rise in economic uncertainty (with energy and banks down 10% at one point) alongside the cushioning effect of lower expected interest rates and the boost that this gives to long duration growth stocks. Most of the FAANG stocks were up by 10% or more and there was also a sense that maybe these US tech titans, with their strong cash flows and fortress balance sheets, might also prove resilient in a recession. The ASX was one of the weaker performers given its high weighting on banks and the fact that the big miners were also on the back foot as fears of a global recession edged upwards. Interestingly there have been as many winners as losers on the ASX in the last two weeks, but the relative weight of the losers (the big 4 banks and large miners) meant that the market was one of the worst performers. Notable winners included Xero, Newcrest, Northern Star, REA Group and Sonic Healthcare. Some of these like Newcrest and Northern Star benefitted from obvious macro tailwinds (higher gold prices), but most were up for stock specific and largely operational reasons, which continues a trend of resilience seen from companies like Wisetech, QBE and Brambles in prior weeks. One fault line perhaps arising from the issues in the banking sector, here and abroad, could be seen in the REIT sector, offices in particular, which were down by over 10%. Occupancy levels remain low, and as the June year end approaches, the market will be worrying that the value of the underlying assets might have to be written down at a time when borrowing costs are rising. In some cases where borrowings need to be rolled over and cash flows are weak, this could prove to be an existential challenge.    

Overall though, while the ructions in bond markets have been fairly eye opening (especially the movement in yields at the short end of the yield curve), it appears that the headline writers have more PTSD from the GFC than the markets, as even high yield (junk bond) indices are only down a percent or so, implying that bond markets are not moving to price in a deep recession just yet. Lower government bond yields also meant positive returns for fixed income portfolios, while gold was the biggest beneficiary (up 10% this month). When all is said, this all amounts to falls of 2-3% for the most aggressive multi-asset portfolios in the last 2 weeks, leaving them flat for the month after the last couple of days, and still in positive territory year to date.          

At the time of writing US markets had just fallen over 1% again, after Fed Chair Powell, in a fairly solid performance, announced another 0.25% rate increase, maintaining that inflationary pressures remain present, pushing back against likely rate cuts later in 2023 but acknowledging that tighter credit conditions (with banks less able and willing to lend) could eventually dampen inflation pressures (or worse). He also stressed in the Q&A with journalists the inherent, and increased, uncertainty that the Fed and the rest of the world face when it comes to both the trajectory of inflation and financial conditions. Shortly thereafter, Treasury Secretary Janet Yellen made a point of telling the US senate that deposit insurance would not be automatically rolled out to higher balances. On the one hand this latest setback has so far not affected bank stocks more than the rest of the market (despite reports to the contrary) and doesn’t necessarily reflect more worries about the banking sector or contagion, but it does underline that the market remains a bit jittery.

‍