SVET Markets Weekly Update (March 20–24, 2023)
On Week 12, we saw market analysts' macro-predictions mostly coming to fruition. The Fed kept to its guns, and the banking system stood against the rising storm. As a result, NASDAQ (o:11614, c:11823, +1.8 percent) and BTC (o:28188, c:27584, -2.1 percent) generally held their ground.
Notable Macroeconomic Updates:
Fed Interest Rate Decision: 5.0 percent (fact), 5.0 (consensus), 4.75 (previous);
Building Permits Final (Feb): 1.55M (fact), 1.524M (consensus), 1.339M (previous);
Existing Home Sales (Feb): 14.5 percent (fact), 5 (consensus), -0.7 (previous);
New Home Sales (Feb): 1.1 percent (fact), -4.5 (consensus), 1.8 (previous);
Durable Goods Orders (Feb): -1 percent (fact), +0.7 (consensus), -5 (previous);
S&P Global Manufacturing PMI Flash (March): MAR 49.3 (fact), 47 (consensus), 47.3 (previous).
On Monday, after the ironic expression "It would be like UBS and Credit Suisse merging" took on an entirely new meaning, traders' lack of directionality led to both NASDAQ (open: 11614, close: 11675) and BTC (open: 28188, close: 28126) staying pretty much at the same levels reached during Thursday and Friday's run.
It is difficult to overestimate the significance of the fact that UBS, which was one of the most affected European banks back in 2008 and was bailed out by the Swiss National (Central) Bank for the sum of $60 billion, is now taking over and providing USD 104B in liquidity to Credit Suisse. CS was one of the least affected banks during the global mortgage debacle. The recent take-over was a result of one-day 'negotiations' between the Swiss government and CS key stakeholders, which some analysts called a "shotgun wedding.
Credit Suisse's assets size exceeds USD 500B (more than one and a half percent of the European banking sector - USD 38 trillion), and its list of major shareholders includes the Saudi National Bank (9.88%), the Qatar Investment Authority (5%), and BlackRock (5%). However, it was purchased by UBS for only USD 3.2B in an all-stock deal with a blatant disregard for shareholders' voting power.
It might be argued, of course, that the refusal of the head of the Saudi National Bank to invest in CS was a major cause of the bank's stocks dropping almost 300 percent in a day and the subsequent daily withdrawals of demand deposits totaling over 10 billion. However, more realistically, this episode must be viewed as an illustration of the total inability of the current authoritarian financial system in the world to cope with new technologies that allow for instantaneous exchange of information and money.
As a result, governments are starting to "override" existing legal statutes and impose their bureaucratic rules over investors' and public assets. This type of "financial governance" brings us several centuries back into the era of Middle Age crowned despots playing with the destiny of their slaves as with pawns on a chessboard. The only viable alternative to such a dystopian financial "order" is a completely decentralized financial system (DeFi) based on a variety and multiplicity of open blockchains.
On Tuesday, BTC remained in the 28th price-zone (opening: 28233, closing: 27785, -1.6 percent), while NASDAQ traders continued to price in the widely anticipated 0.25-point increase as a result of Wednesday's FOMC meeting (opening: 11764, closing: 11860, +0.8 percent). However, economic fundamentals persistently pointed markets in the opposite direction, with the NAR reporting home sales ballooning 14.5 percent in February to 4.58 million - the largest monthly percentage increase since July 2020 - while analysts were only expecting 5 percent. This is definitely not what the Fed's hawks wanted to see as a result of their 15-months-long QT program.
On Wednesday, after the FOMC decided on a 0.25 point increase (Fed's Projections: current - 5.1, 1st year - 4.3, 2nd year - 3.1, longer - 2.5), traders played the classic "buy-the-news-sell-the-fact" game, resulting in the NASDAQ retreating 1.6 percent (o: 11857, c: 11669) and BTC plunging 5.5 percent (closing at 26667) from its day's opening (28220).
Powell's commentary delivered during the follow-up press conference demonstrates that the Fed board is unanimous in their decision to put the cart before the horse. Continuing with the rate hike, aiming to destroy the labor market, will only lead to a more severe and prolonged recession without addressing the main causes of inflation, which include a historic worsening of the global macro-economic climate, with staple supply chains (notably for energy and food) disrupted for the foreseeable future, and gigantic consumer markets gradually closing up for the world's leading corporate producers on both sides of the ocean.
Powell's unobserved policy will also contribute substantially to the unprecedented takeover of private businesses by governments and large corporations, using autocratic, above-the-law methods of governance that gradually replace collegian decision-making processes. We are now at the beginning of this process, where, under the guise of pursuing financial stability, Washington bureaucrats are facilitating the consolidation of banking assets under the direct management of a select few, who are subordinated to entrenched politicians and financial behemoths.
Exhibit: On March 16 several banks, including JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, deposited $30 billion with First Republic Bank after Fitch and SP downgraded its credit rating. FRB holds a balance of over $200 billion, $166 billion of which is comprised of loans. Most of these loans, specifically $102 billion, are secured by residential real estate in Boston, New York City, San Francisco, and Los Angeles. This move might be just the first step in building a wall that separates the quasi-competitive banking market of the past from the centrally regulated financial Gulag of the future.
As for other macroeconomic news on Wednesday, there was quite an emphasis in the mass media on the results of the Xi-Putin meeting in Moscow. The relations between the "Celestial Empire" and Russia, which is twice the size of China (9.6 million km²) but has only one-tenth its population (1.4 million) and GDP (19.9 trillion), have always been quite complicated, to say the least.
On the one hand, the history of Sino-Russia relations consists of open military confrontations, such as the Manza War in 1868 or clashes near Zhenbao (Damansky) Island in 1969, as well as smaller, ever-lasting border disputes "settled" in multiple treaties such as the Treaty of Kyakhta (1729) or the Treaty of Peking (1860), which assigned Outer Manchuria (Primorskiy Kray) to Russia. On the other hand, there have been a number of "eternal" alliances, such as the Li-Lobanov Treaty (1896), or famously, the "China-Soviet Union: Treaty of Friendship and Alliance" (1947).
The historically latest surge of camaraderie in the 1940s was abruptly replaced, first by the Sino-Soviet Split in the 1960s and later, after President Nixon's visit to Beijing in 1972, by open geopolitical rivalry in the 1980s.
Both Russian and Chinese politics are highly personalized, so typically there is a span of 20-25 years, which is the average length of stay in power for political figureheads in those countries, between periods of hostility and friendship. It seems that the current Putin-Xi "rapprochement" may also endure for a prolonged period of time, considering Xi came to power in 2012.
Historical evidence demonstrates that the highly emotional political rhetoric that is typical at the beginning of these periods does not usually result in prolonged wars or economic and social amalgamation. These two countries have always been too distant from each other in terms of ethnicity, culture, society, economy, and politics to make this alliance stable. It is mostly based on "against" premises rather than "for". The earlier Russo-China friendship was "against Britain" and then "against Japan," while the current one is "against the USA" once again.
On a practical note, however, neither China's export of consumer goods to Russia (USD 38 billion in 2021) would be able to replace its 10-fold exports to the USA (USD 365 billion in the same year), nor Russia's natural gas supply to China (22 billion cubic meters in 2021, with a maximum increased capacity of up to 38 billion cubic meters in 2025) would be able to replace Russian gas exports to Europe (around 140 billion cubic meters of gas or about 68 billion US dollars in 2021).
More consequential is the potential for military cooperation between China and Russia. For example, Russia's tank manufacturing capacity is estimated to be around 1,000 tanks per year, with about 17K tanks in reserve (with 3-4K in a "battle ready" state). Theoretically, this could be complemented by comparable Chinese tank's productions (exact numbers of tanks produced each year in China are unknown).
Additionally, China reportedly holds at least 8K tanks in reserve part of which could potentially be sold to Moscow. However, it must be added that almost all of these tanks are of the old, post-World War II generation with weak armor and reduced communication/electronic capabilities. With about 3,000 tanks incapacitated by the Ukrainian army each year, almost doubling Russia's heavily armed machinery forces could substantially prolong the ongoing war in Europe.
Overall, however, the closeness between Xi and Putin has the potential to strengthen Russia both economically and militarily in the short to medium term.
On Thursday, while politicians in Congress were busy grilling Mr. Chew (TikTok's chief), and macroeconomic fundamentals such as home sales and jobless claims were released without any big surprises, traders had nothing to focus on except some minor technicalities on the daily graphs. For instance, they bought out BTC's Wednesday dip (o:27470, c:28369) and formed a continuation triangle for NASDAQ (o:11811, c:11787).
Home sales increased by 1.1 percent in February, following a 1.8 percent rise in January. Meanwhile, jobless claims increased slightly to 1,694K in the week ending March 11, up from 1,680K in the previous week, but still just above analysts' expectation of 1,680K.
On Friday, European traders were jittery about the stability of the banking sector, with Deutsche Bank AG taking most of the heat (12.47, c: 9.35, -25 percent). However, this panic did not spill over to the other side of the Atlantic Ocean, as the NASDAQ remained inside the bullish triangle (o: 11747, c: 11823) and BTC decreased by a meager 1.8 percent during the daily session (o: 28079, c: 27584).
FYI: Deutsche Bank AG is Germany's largest lender, with total assets of approximately USD 1.448 trillion. The bank employs nearly 85,000 staff across 58 countries and is one of 30 "systemic banks" closely monitored by regulators. Despite the recent downfall in its share prices, the bank's balance sheet appears strong on the surface. In 2023, the bank earned a profit of EUR 5.66 billion, with a 9.4 percent return on tangible equity and a robust core equity ratio of 13.4 percent. Many analysts attribute the recent episode to traders' nervousness. However, with the Federal Reserve stubbornly continuing their "scorched-earth" rate policy, I am not so sure about the future of even the largest banking institutions.
On the macroeconomic side, the picture is still unclear, with durable goods dropping by 1.0 percent in February (defense aircraft contributed -11.1 percent to this decline), following a 5.0 percent plunge in January (market forecasts were predicting a 0.6 percent increase). At the same time, the S&P Global US Composite PMI jumped to 53.3 in March - the fastest pace of expansion since May 2022. It appears that expectations are again overshooting fundamentals.
In Week 13, it is expected that February's Personal Income and Spending (published on Friday) will drop significantly from 0.6 percent to 0.3 percent, as well as Core PCE to decline from 0.6 percent to 0.4 percent. On the crypto side, traders will reluctantly watch Mr. Barr's testimony before a House panel on Tuesday and Wednesday regarding Silicon Valley Bank and Signature Bank. Nothing positive for the industry is foreseen to come out of that testimony.