Inside Markets

FCNA’s acquisition of SIVB assets and deposits has helped near-term risk sentiment, but markets are still looking for additional policy measures from the Fed, FDIC and Treasury.

Recent equity market resilience has been driven by lower bond yields and rotation into growth sectors. Sidelined cash and value sectors have been a source of funds with mega-cap Tech as the primary beneficiary

Credit standards have been tightening over the past year as banks anticipate a recession. The tightening of credit standards will now accelerate and lending will slow as banks build cash on hand to match the velocity of recent deposit flows.

A week-long back up in 5-year Treasury yields stalls out at moving average price support near 3.80%. The decline in 5-year yields looks like it will resume with a near-term target of 3.30%.

In addition to the Fed decision, markets will pay close attention to Powell’s press conference for: 1) near-term direction on efforts to contain financial contagion; 2) associated impact on financial conditions from expected tightening of bank lending standards.

The debate over whether the Fed hikes by 25bp or decides to pause at tomorrow’s meeting seems less important when you consider that an estimated $440B of its BTFP facility has already been utilized.

A de facto end of the tightening cycle has driven bond yields and kicked off equity rotation into growth sectors and Tech in particular.

Rotation into growth from value sectors began late last week after 10-year real yields reversed from strong technical resistance at +170bp.

Bond market volatility has spilled into equity markets and other cross markets amid low liquidity conditions. Implied equity volatility as measured by the VIX Index is pressing toward levels from last September.

Silicon Valley Bank’s failure highlights the pressure of rising funding costs. The Fed backstop on deposits at SIVB and SBNY reduces the likelihood of more regional bank failures, but the pressure on a banks underlying business model remains acute.