Banking Chaos: Both European and US banks are feeling the pain currently following the demise of 3 US banks (Most notably the Silicon Valley bank). This has caused speculation and fear amongst investors that more banks will face liquidity shortages, but why is this happening in the first place?
Bonds Yields: For those who don't know, bond yield is the annual % you make on a bond (Kind of like interest on a stock). Only, at face value, this is 3% on a $1000 bond (For example). But if bond yields go up to 3.3% (Due to interest rate hikes by the FED for example), the bond value goes down to $900, to balance it out. So in this way, bond yields & bond prices are inversely correlated (One goes up, the other goes down). This has caused many banks to take losses, as they were heavily invested in bonds since they're quite a low risk.
But with all of the current market and economic difficulties, many people are withdrawing money from their banks. Due to banks and their fractional reserves system (Most banks only have 10% of deposits in liquid money, the rest is invested), banks are forced to sell these bonds at a loss to meet withdrawal demand. This liquidity shortage is exactly what caused the Silicon Valley banks' demise.
impact On Markets: This impact markets through two things. Firstly it just causes general fear since banks at a certain level get systematic (If they fail, the whole economy collapses), so investors fear that those level of banks may run into similar issues (Which is unlikely imo). Secondly, it pushed the DXY up since the Euro really weakened due to European bank weakness. This then pushed the DXY up, which in turn pushed markets down (Due to their inverse correlation, DXY goes up, markets go down and vice versa).
Inflation Down: We did see inflation come down, with the PPI coming down on a month-over-month basis. This pushed markets up, and is exactly what we want.-JIRO.
