Weekly house view | Everything everywhere all at once

The turmoil in US and European banking is more a crisis of liquidity than solvency and should not be compared with the global financial crisis, when banks’ trust in each other vanished. By contrast, last week the top 11 US banks injected USD30 bn into First Republic Bank to help restore confidence in the sector. Their commitment suggests we are seeing cases of idiosyncratic rather than systemic risk. Furthermore, central banks globally have coordinated dollar liquidity funding. Nevertheless, the latest crisis has exposed regulatory inadequacy in the US. In the face of tighter rules, we expect more banks to join the 500 that have failed in the US since 2001. As deposits move from smaller banks to larger ones, the formers’ capacity to lend will be affected. With small and midsize banks making up 80% of commercial real estate loans in the US, half of commercial and industrial loans, and 45% of consumer loans, the probability of a US recession in H2 2023 has increased. Lending conditions were already tightening before last week and may now tighten further. The chance of a US recession has therefore increased. We expect banks’ profits to be revised lower as they try to attract more deposits, thus impacting their interest margins. Until confidence is restored and the outflow of unsecured deposits is stopped, banks could remain under pressure. The banking crisis may also influence the Fed. While the latest consumer price index report suggests a 25bps hike in the fed funds rate is on the cards this week, the banking turmoil will weigh on future policy decisions. 

Despite the banking sector tensions, the European Central Bank (ECB) last week tightened its deposit rate by 50bps as expected, bringing it to 3%. While mentioning that “inflation has been too high for too long” ECB president Christine Lagarde refused to confirm further rates hikes in view of the “elevated level of uncertainty”. This effectively ends forward guidance. The ECB indicated that it may re-start long-term refinancing operations on an ad hoc basis, thus showing its readiness to inject liquidity into the banking system if needed. The People’s Bank of China (PboC) announced a surprise cut in large banks’ reserve requirement for the first time this year, thus providing liquidity and providing a strong pro-growth signal. President Xi’s visit to Moscow this week will be an important indicator of China’s stance on Russia’s war in Ukraine.

We remain underweight in equities and long in duration. Banks and cyclicals were the biggest losers on equity markets last week, while government bonds and gold were the main winners, with spot prices for gold rising 6.5% on the week. We continue to be overweight gold and precious metals. But large tech also did well last week as investors looked for companies with non-cyclical growth. In growth sectors like tech, we remain focused on companies that generate consistent positive cash flows. We also believe Asian stocks will continue to benefit from China’s re-opening.