Markets have been on the ropes since late last week when a Silicon Valley Bank press release sparked a run on regional banks.
As Wall Street scrambles to reprice the financial sector -- for what, up until last week, were unforeseen risks -- selling pressure and panic is spreading to Europe and other parts of the world.
Regulators are taking action. And the Fed is taking notice as expectations for future rate hikes plummet.
While Bitcoin and tech stocks have performed exceptionally well through the volatility, cyclical stocks and commodities have been hit hard, with energy and the CRB Index breaking to new lows this week.
What are we to make of all this? Should we be concerned?
Is the regional banking crisis a contained event, or is it about to send reverberations through the broader market and economy?
Whenever we have questions like these, the first place we want to look is the bond market.
US bank stocks big and small took a beating Thursday, with the Bank ETF $KBE posting its largest single-day decline since 2020.
The steep sell-off came on the heels of Silicon Valley Bank’s $SIVB Wednesday announcement of a $1.8B loss, mainly due to accepting unrealized losses in US Treasuries.
Based on SIVB’s acute exposure to the tech industry, you can argue larger banks with more diversified portfolios and clients don’t carry the same risk. And they don’t.
Regardless, the next chart reveals a storm brewing beneath the surface...
Check out bank stocks (KBE inverted) overlaid with the US Treasury 2s10s spread:
I inverted KBE to highlight the strong relationship between banks and the yield curve. The two lines look almost identical over longer timeframes.
Developed European benchmark interest rates are posting fresh highs. Those potential failed breakouts back in early January have quickly turned into nothing more than false or premature moves.
And while US yields continue to climb, their recent rise pales compared to their European counterparts.
Markets churn sideways, plagued with indecision. But one thing is certain…
The global rising rate environment remains intact.
Developed European benchmark interest rates are posting fresh highs. Those potential failed breakouts back in early January have quickly turned into nothing more than false or premature moves.
And while US yields continue to climb, their recent rise pales compared to their European counterparts.
What does that imply for domestic rates in the coming weeks and months?
For the past year and a half, we have turned to developed European yields for insight into the direction of domestic interest rates.
The analysis proved insightful as the rising rate environment has been global in scope. Europe has given a nice heads-up regarding the direction of yields stateside. And the market continues to support this approach.
Rates continue to rise along with concerns of an impending recession.
The narrative is quickly shifting back to tighter monetary policy following last week’s higher-than-anticipated CPI and strong economic data. I don’t pay too much attention to this gossip. But I do keep a pulse on the latest discourse surrounding markets.
With these newfound recessionary fears circulating, I want to share a chart I like to avoid… The 2s10s treasury spread.
I can’t remember the last time I wrote about the yield curve. It’s been so inverted (deepest inversion since the early 80s) for so long that I honestly don’t know what to think.
Nevertheless, the overlay chart of the Staples sector $XLP relative to the S&P 500 $SPY with the 2s10s spread conveys an important piece of information:
Honestly, I was only half serious. I pay attention to the Fed and CPI data – mainly to stay aware of the increased volatility accompanying important release dates.
I thought it was odd bonds didn't react to last week's rate hike. Regardless, the lack of volatility represents a positive development for risk assets, especially stocks.
