The hallmarks of market turns are never obvious in the moment, yet they build over time, and the cracks are well understood but often dismissed. A turn comes with a psychological shift, where market participants in aggregate shift their risk/reward calculations meaningfully enough, often coinciding with a shift in narrative.
Are we in such a moment? Thursday’s strong sell-off in US regional banks (KRE) brought up memories from 2023’s SVB-related sell-off. As of now, not much is really clear. There are direct credit losses, and then there’s NDFI (non-depository financial institution lending). It’s the second that’s causing the most angst. Put simply, it’s a regulatory issue. Bank lending to a financial intermediary (shadow bank) rather than the end borrower can drop RWA (risk-weighted assets) treatment from 100% (direct lending) to an average 22% (intermediary). The write-offs so far seem very small for Zions Bancorp and Western Alliance; it’s the contagion that people will always be most worried about.
Meanwhile, the Fed reported 8.35 billion USD tapped its standing repo facility on Thursday. This is becoming a now not-so-unusual occurrence. Standing repo is a level below the discount window – it’s designed to alleviate a short-term liquidity requirement rather than address a more untoward emergency. The Fed doesn’t reveal who/why the facility was used. Typically, SRF is a fallback for use through quarter-end or a tax payment date, for example.
More immediately, 25 regional banks are reporting today, which will help the market determine whether there is anything systemic underlying this current worry. If this is the start of a credit default cycle, the macro script is going to be epic.
The buy-and-hold portfolio is up 21% YTD and saw a bit of a drawdown from last week’s trade-war-related volatility.
As in all things, this could be much about nothing or the start of a trend change. This requires an innate focus on risk management. As such, I would recommend that everyone reviews their book and risk appetite at current levels. Eliminate unwanted risk exposures, especially when you are applying leverage or have open tails. Let’s see how today plays out, but the technical picture for equities doesn’t look great. The trading models have done an amazing job of warning us of the loss of momentum in indices over the past few trading days. At this juncture, they are screaming on a broader scale, so I urge any subscriber to examine the extensive chart pack below thoroughly.
A reminder that you can now also use my models in TradingView scripts, which I made available for subscribers to use on their charts. This is not free and incurs an additional cost. These are my momentum, reversal and intra-day models I am often referencing.
If you are interested, ping me an email with your TV username. Note that only paying subscribers will be granted access. No exceptions.
Let’s now read Macro D’s latest thoughts on the shutdown. In addition, you will find the updated chart pack of all 250+ charts across the global macro universe.
Have a wonderful weekend!