- The UBS/Credit Suisse merger and S&P downgrade of First Republic to B+ all but guarantees that the coming week will bring more turmoil.
- Bank exchange-traded funds (ETFs) fell 14.5% as regulators struggled to stabilize the banking sector, with mixed results.
- Yet the broader equity market was remarkably resilient, ending the week up 1.5%.
- We see two reasons – hopes that the Federal Reserve (Fed) pauses or even cuts rates; and continued solid earnings reports.
- Earnings might mean that companies are putting 2022 supply and inventory problems behind them, but outlooks do not seem to consider 2023 uncertainties.
- With only eight companies reporting next week the big driver will be what regulators do (or do not do) to stabilize banks and the broader financial markets.
What We Learned Last Week
As the week opens, UBS has acquired Credit Suisse, and S&P has downgraded First Republic (FRC) from BB+ to an unimaginably low B+ despite major banks depositing $30bn in a show of support.
It is apparent that regulators managed only to deliver incremental fixes to the problems that are overwhelming banks. Given the controversies already surrounding the UBS/CS merger (including writing down AT1 bonds to zero) and the apparent verdict on FRC, the crisis is likely not over.
The obvious question is: now what?
For starters, US equity markets may be less resilient than last week. After the S&P 500 (SPX) hit a closing low of 3,855 on Monday 13 March, it rallied in fits and spurts to close up 1.5% on the week at 3,917 even as bank related ETFs (KBWB and KRE) were down 14.5%. As markets responded to the ongoing efforts to prevent the Silicon Valley Bank failure from infecting the broader banking system, there remained an underlying faith that the US government and regulators would stabilize markets.
Also supporting equities were hopes that the Fed will at least pause its hiking cycle (and perhaps cut rates), and earnings.
Last week saw more good earnings and outlooks. Homebuilder Lennar Corp (LEN) posted solid beats on revenue and earnings, despite the moribund housing market. Adobe Inc (ADBE), with its creative product line, managed to post impressive growth even without releasing new products. Speciality retailer Five Below (FIVE), purveyor of luxury items (premium phone cases, headphones, stationery, pet products, etc.) was down on a soft quarter-ahead forecast but remains bullish for the full-year.
FedEx (FDX) finally delivered on promised cost cuts and reported adjusted earnings of $3.41 per share vs consensus $2.71.
Discount retailer Dollar General (DG) performed in line with expectations and offered a solid full-year outlook.
We are sceptical of the optimism about 2023. Many companies seem to have put 2022 problems with supply chains and wrong-footed inventories behind them, but banking sector problems aside, many new challenges lay ahead.
The Week Ahead
Next week will not be about earnings as only eight companies report, and they are not bellwethers. Rather, it will be about what governments and regulators do to either stabilize everything or let market forces deal with failing firms. The Fed will likely pause or raise rates 25 bp; the big question will be its messengering on inflation and next steps.
Regulators will likely face another very long week.
In short, expect another volatile week.
- Consumers are spending on some stuff – is Nike’s stuff making the cut?
- GameStop (GME) trades near $16 – about a fifth of its height as a meme stock in 2021. But its earnings will attract notice.
- Accenture’s (ACN) outlook will be a key read on how corporate IT budgets are looking for 2023.
- Darden Restaurants’ (DRI) results will either confirm that people are still eating out, or that inflation is keeping them at home.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
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