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There is increasing talk of the SVB Financial (SIVB) failure becoming a potential systemic event for the market.
The 2-year Treasury yield (US2Y) (SHY) fell 31 basis points on Friday to 4.59% and is half a percentage point in two sessions. That’s the biggest drop since 2008, and it can’t be attributed to just a slightly lower-than-expected drop. average hourly earnings in february.
While systemic contagion speculation may be way ahead of the facts (“Just saw SVB being described as a ‘Lehman moment…give me strength…hyperbole has run rampant here…decent sentiment indicator TraderX analyst Michael Brown tweeted), it only takes one catalyst to trigger an economy-altering event. And there are plenty of potentials, according to BofA strategist Michael Hartnett.
A year ago, the fed funds rate was at 0% and the yield curve (TBT)(TLT)(SHY) was sloped 40 basis points (now 4.5% and 100bp inverted). There have been 290 global rate hikes since then, which is not a prelude to a Goldilocks scenario, but a prelude to a “hard landing and credit events,” Hartnett said in his weekly “Flow Show” note.
There is already a credit event emerging in technology (XLK) (XLC) and healthcare (XLV) venture capital and private equity lending, Hartnett wrote.
That area looks even rockier in the wake of SVB.
Other catalysts include government debt, shadow banking and private equity, cryptocurrencies, speculative technology, real estate, CTAs, collateralized loan obligations and mortgage-backed securities, Hartnett said.
There are “so many potential catalysts for (a) a systemic deleveraging event triggering political panic/end of Fed tightening; the truth is irrelevant in the source of the event (who named UK gilts as a credit event 22), simply that it will happen and it will happen to cause panic among policymakers (the BoE restarted QE last October) and investors should be prepared at that point to deploy cash in new leadership assets that will outperform in an era of higher inflation,” he said.
Currently, the stock market is like a “crazy donkey,” according to one trader, and there are “bad March vibes,” Hartnett said.
The “S&P500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) in a neurotic 3.8-4.2k trading range driven by data-dependent Fed reliance,” Hartnett said. That ends once the data is “unequivocally recessionary (eg, negative US payroll > -200k) and the yield curve slopes.”
If oil (USO) (BNO), HY (HYG) (JNK), chips (SOXX) (SMH), banks (KBE) (BKX) and EM (EEM) pick up a bid, the S&P heads towards 5000, but if not headed for 3,000, he said.
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