Home About Archives RSS Feed

@theMarket: Financial Contagion Spooks Markets

By Bill SchmickiBerkshires columnist
The global banking sector took center stage as three U.S. banks bit the dust and a fourth large bank in Europe floundered. This puts the Fed between a rock and a hard place.
The Federal Open Market Committee meets this coming Wednesday and, before the collapse of the Silicon Valley Bank, was expected to raise interest rates by 25 to 50 basis points. Today, expectations are split between no rate hikes at all, and maybe one more hike of 25 basis points and then a pause.
Investors large and small held their breath last weekend in the wake of three bank failures. Fears of financial contagion swept the country throughout the week. Regulators acted on several fronts to contain the potential fallout. The FDIC announced that they would fully protect all depositors, while President Biden assured the nation that U.S. banks were solid.
The Federal Reserve bank also announced a new $25 billion bank term funding program that offers one-year loans to banks under easier terms than it typically provides.
Investors on Monday responded positively to the news, but the near collapse of yet another bank later in the week, this one a large European bank, Credit Suisse, had traders once again running for the hills. Banking stocks tumbled again.
Most Wall Street pundits blamed the Fed's rapid rate hikes over the last year for the banking fallout. As such, a rising chorus of alarmists is insisting that the Fed, needs to back off from any more rate hikes immediately. Over in the bond market, the vigilantes are betting that the new scenario is a "one and done" 25 basis point hike in March and then a pause. Some strategists are even expecting the Fed to begin easing its tight money policies by the middle of the year if not sooner.
The easing argument is that regulators (because of the bank failures) will soon be increasing the number of banking regulations in the financial sector, which will reduce their ability to lend money. If so, that would slow the economy, reduce inflation, and therefore do the Fed's job for them. In that environment, there would be no need to raise interest rates further.
As it stands, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) for last month indicated some small progress toward slowing inflation. However, the data is not enough to dissuade the Fed from backing off its program. The economy is still growing, and employment is still much stronger than the Fed would like to see.
The question on many investors' minds is whether the Fed will back off at next week's meeting or risk further financial contagion and continue its interest rate hikes.
One indication that they will continue their program was the actions of the European Central bank (ECB) on Thursday. Beleaguered Credit Suisse was given a $54 billion liquidity lifeline by the Swiss National Bank. It may not solve the Swiss bank's problems, but for now, it appears sufficient.  investors still expected that the ECB's planned interest rate hike of 50 basis points would be delayed or even canceled.
Instead, the ECB hiked rates a half point and assured investors that the eurozone banking sector was resilient, adding that they stood ready to supply liquidity to banks if needed.
It was no accident, in my opinion, that U.S. Treasury Secretary Janet Yellen told members of the Senate Finance Committee almost the same thing assuring them that the U.S. banking system remains sound.
I am sure the Fed and the Treasury discussed the ECB's intended actions. In times of turmoil in the global banking system, central bankers confer with each other regularly, as do their counterparts in the Treasury. It seems to me that the odds favor Chairman Jerome Powell and the Fed following the ECB's lead and continuing with their tightening program.
Stocks have had a mountain of bad news this week and tested the 3,800 level on the S&P 500 Index, which was my downside target. From there, we bounced more than 160 points before falling back again. I expect markets will continue to trade in these wide swings until the Fed meeting in the middle of next week. From there, the market’s direction will be Powell-dependent. I am betting it is up.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.



Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
SVHC Weekly Health Update: May 26
BRO MX Ordered to Comply With Conservation Restrictions
EforAll Showcase and Gala at Hot Plate Brewing Company
Senator Mark Announces June Office Hours
What should you expect from your investments?
Grace Kelly Quartet to Perform at MCLA's Venable Theatre
Pittsfield Sees Significant Spending of ARPA Funds in First Quarter of 2023
MCLA's Rachiele Earns All-Region Honors
Pignatelli, Mark Hold Town Hall Forum
Berkshire County Remembers Veterans on Memorial Day

@theMarket (450)
Independent Investor (451)
Retired Investor (143)
May 2023 (8)
April 2023 (8)
March 2023 (8)
February 2023 (8)
January 2023 (6)
December 2022 (7)
November 2022 (7)
October 2022 (8)
September 2022 (9)
August 2022 (5)
July 2022 (7)
June 2022 (7)
Banks Employment Euro Pullback Markets Retirement Oil Taxes Crisis Debt Europe Jobs Commodities Currency Stocks Bailout Federal Reserve Banking Election Fiscal Cliff Recession Debt Ceiling Rally Europe Energy Interest Rates Deficit Greece Congress Japan Selloff Stock Market Economy Stimulus Metals
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Debt Deadline Hangs Over Markets
The Retired Investor: Rents Rising as More Americans Priced Out of Housing Market
@theMarket: Markets Signaling No Debt Default
The Retired Investor: Food Prices May Be Moderating in Some Cases
@theMarket: Stocks Playing a Game of Inches
The Retired Investor: Retiring Boomers Keep Job Gains Buoyant
@theMarket: Banks Bashed as Fed Continues to Raise Rates
The Retired Investor: Efficiency vs. Safety in America's Railroads
@theMarket: Investors Await Fed Week
The Retired Investor: Secret Behind Low Interest-Bearing Checking Accounts