Risk assets continued their rally last week, and even news of credit problems at yet another regional bank and a prominent economist’s declaration that the Federal Reserve won’t cut rates until 2024 couldn’t stop the rally. The SPX has risen for 16 of the past 18 weeks, a run not seen since 1971, according to Deutsche Bank.
On the one-year anniversary of SVB's collapse, New York Community Bancorp's stock price plummeted last Friday after management said the bank had discovered major deficiencies in its internal loan review process, leading to a 100% goodwill impairment ($2.4 billion) and a management team overhaul. However, unlike last year's widespread panic, Wall Street seems to think this is just an isolated case, and the weakness of the stock's price-to-book ratio (about 0.5) has largely fully reflected these concerns, even though NYCB's stock price plunged 20% on Friday, while the KBW Regional Bank Index only saw a slight correction (about 0.3%).
There is no recession in the U.S. (the Atlanta Fed estimates GDP growth of about 3% in the first quarter), the U.S. consumer is still quite strong (Bank of America mentioned that consumer spending grew by more than 3% in February), and job/wage/inflation growth remains stable. Apollo's chief economist said that the Fed will not cut interest rates in 2024 because the central bank will deal with inflation and maintain high yields for most of 2024. Slok pointed out that the sharp rise in U.S. growth expectations, the still tight job market, high core inflation, and the overly loose financial situation will jointly suppress easing expectations. In addition, the Fed's verbal policy shift starting in the fourth quarter of 2023 has provided enough impetus for asset prices.
Chairman Powell will provide his semi-annual monetary policy update to the Senate Banking Committee on March 7, when he will have the opportunity to discuss the recent rebound in US inflation data and be questioned on the rationale for the dovish turn in December. In addition, earnings season is over, and corporate profits are impressive and reflected in stock prices. According to Bloomberg, the SPX earnings have the opportunity to exceed pre-season forecasts by the largest margin since the fourth quarter of 2021. The growing profits have undoubtedly caught Wall Street off guard, and strategists have rushed to raise their SPX year-end targets, with more than six forecast increases reported in the media in the past two weeks alone.
Similar to cryptocurrencies, retail trading activity has surged, with volumes in individual stock options increasing, even well above 2021 highs, and further accelerating following positive earnings results from NVDA and META.
In China, the stock and bond markets are finally seeing an exciting correlation change, with prices of both asset classes finally moving in sync (lower rates = higher bond prices). Are we at a turning point for Chinese assets? Is the PBOC’s easing finally starting to be reflected in stock prices? Hopefully, the positive price action will continue...
On the crypto front, record funds continue to flow in via ETFs, and positive market sentiment seems to have spread to altcoins and memecoins, with SOL (+ 17% ), XPR (+ 16% ), Cardano (+ 21% ), Polkadot (+ 19% ), Doge (+ 7% ), and Shiba (+ 131% ) all accelerating their gains over the past seven days.
On the options side, demand for short-dated options has surged, with open interest concentrated around the $65,000 to $75,000 level. Options exchange Deribit reported record volumes last week, with 24-hour volume exceeding $12.4 billion and open interest exceeding $27 billion. The huge market interest in short-dated call options is pushing up implied volatility and causing a small gamma squeeze for option sellers, with most of the exposure expiring on March 29, so expect prices to fluctuate (up and down) for most of the month, and be careful to manage risks while enjoying the gains.
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