Contagion Lurking

Banking Fears Continue 

Contagion fears are not yet going away – bank shares are lower again this morning and weighing on broader sentiment. Yesterday we witnessed Deutsche Bank credit default swaps blow out and shares this morning are down 6%. UBS shares fell more than 7%. UBS and Credit Suisse are facing a DoJ investigation over Russian oligarch links. Bill Winters at Standard Chartered says the decision to wipe out CS AT1 bonds will have profound consequences...always the unanticipated consequences of intervention – in this case it’s Merton’s reason number three: Immediate interests overriding long-term interests. EU leaders gather in Brussels today. 

Europe Slipping as a Result 

European indices fell by around 1% in early trading on Friday, erasing some of a decent rally this week as investors sought to see the glass half full in the wake of the CS-UBS forced marriage. US bank shares were weaker yesterday with First Republic down 6% and the KRE regional bank ETF off by almost 3%.  The Nasdaq was up 1% and the S&P 500 rose a modest 0.3%. As I said many times in the last fortnight – it only stops once people stop asking who’s next. And it doesn’t seem like we’re at that stage yet.  

A Grim Silver Lining for Central Banks? 

As the Federal Reserve aims to tackle inflation and slow down the US economy, it faces an unintended consequence of a cutback in bank lending. The recent collapse of two major US banks has led to instability in the financial system, making lending standards stricter and resulting in less spending by consumers and businesses. Banking crisis could help reduce inflationary pressures, but there are concerns that the economic slowdown could be too severe and could potentially push the economy into a recession. As a result, the Fed is now in a delicate balancing act as it tries to curb inflation without causing too much damage to the economy. Summarised neatly by former Fed Economist Claudia Sahm, “No one put bank failures in the toolkit, but the reality is that’s what’s happened.” 

A Mixed Bag Global Bag 

UK retail sales have come in stronger than anticipated, prompting the Bank of England's Governor, Andrew Bailey, to adopt a cautiously optimistic outlook. The figures suggest that the country may have staved off the possibility of recession, at least for now. In contrast, there seems to be a bipartisan agreement in the US to either ban or sell TikTok, a social media platform that has gained immense popularity. The move could potentially impact the platform's millions of users and the wider social media landscape; and equally, dampen the tech boost we’ve seen as a response to recent banking fears. In Japan, the core Consumer Price Index (CPI) has slowed down due to the support from the energy sector. The February reading stood at +3.1%, lower than January's 4.2% figure. 

Hindenburg Explodes (No, Not That One) 

Payments company Block tumbled after short seller Hindenburg – our old friend that took on Adani – said the company had inflated user numbers and facilitated illegal transactions. Hindenburg said its 2-year investigation “has concluded that Block has systematically taken advantage of the demographics it claims to be helping. The “magic” behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics.” 

Hindenburg even made a rap compilation video to highlight its case. It’s quite something. Hindenburg notes: “I paid them hitters through Cash App”— Block paid to promote a video for a song called “Cash App” which described paying contract killers through the app. The song’s artist was later arrested for attempted murder…who needs crypto!