Early Update – Banks Breaking Bad

02May

11:22 a.m. ET

The open has been fast paced with a lot of news and data in this morning.

In data:

  • JOLTS Jobs Openings totaled 9.59 million in March from a revised 9.974 million in February (from 9.931 million). This is 2nd biggest 3 month drop in job openings on record.
  • Factory orders rose 0.9% in March, missing consensus of 1.4%, and from the prior revised decline of 1.1% (from -0.7%). Factory orders weren’t as robust as they appear at first look. Nondefense aircraft and parts orders, up 78.3%, drove the increase. Excluding transportation, new orders were down 0.7% month-over-month for the second straight month. U.S. Core Factory Orders saw their first annual contraction since December 2020.

Then there’s other news:

  • Morgan Stanley  announced it’s going to cut 3,000 jobs and IBM will pause hiring for jobs that can be done with artificial intelligence.

But what’s really ugly this morning are the banks. In last night’s Daily Wrap I write the following on the subject,

“As for the big weekend news, JPMorgan Chase bailing out of First Republic, the deal doesn’t put any structure in place that strengthens the banking system to calm investors’ nerves with regard to the potential of more bank runs. “

While the solution of JPM was more politically palatable for the FDIC, I think it was a big mistake as it was a one-off solution and chalked up as just a single bank with a bad business model, rather than putting  structure in place to calm nerves, and we are seeing that this morning with the banks.

The KBW Bank Index is down -5.2% and Regional Banks are down -7.5%.

The S&P and Dow are down similarly, while Dow Transports and Small Caps are the worst and NASDAQ-100 is the best, supported by relative strength in the mega-caps.

SP-500 -1.7%, Dow -1.65% (Transports -2.45%), NASDAQ-100 -1.3%, Small Caps -3%.

The morning weakness puts the major 3 averages back inside the rectangle ranges from April.

SP-500 (30m)

The Most Shorted Index gave back the 2 days of gains shortly after the open, and moved to the lowest level since the COVID crash.

VIX is up +19.9% while VVIX is up +12.3%, which gives more credibility to the analysis yesterday morning that relative strength/weakness trends in VVIX that are leading VIX, are appearing at the top and bottom of the market averages’ rectangle ranges, suggesting that prices aren’t moving from them right now, but maybe after the FOMC tomorrow. The Absolute breadth index is little changed at 21.

All 11 S&P sectors are lower with the cyclical Energy (-4.35%) and Financial (-2.85%) sectors the worst. The defensive sectors are the least worst. The mega-cap index (MGK -1.15%) may be down, but it’s outperforming the S&P Equal Weight Index (-2.25%) by over 100 basis points.

The real ugly stuff are the banks. There are simply too many huge moves to go through in a timely manner, but a few-

PacWest Bancorp. (PACW -36%), Western Alliance (WAL -21.6%), Zions Bancorp. (ZION -16.2%). It seems the market is sending the Fed a message this morning as the Fed kicks off the 2-day FOMC meeting today. There may have been irresponsible, risky behaviors by some of the banks, but it was the stress of Fed rate hikes that cracked them wide open. And it was the Fed, FDIC and other governmental agencies that missed the opportunity to address the situation after the first warning shot in March.

As mentioned above, it’s not just the Regional Banks down sharply, but the bigger banks too. Financial instability isn’t good for any bank.

Regional Banks (daily)

KBE Bank index (daily)

Treasury Yields are taking a pounding on more recessionary data and news this morning, and a flight to the safety of bonds, which may not feel so safe with the debt ceiling looming large. The 2-year yield is down 17 basis points, and the 10-year yield is down -13 basis points, easily erasing yesterday’s gains. The drop is the Fed-sensitive 2-year yield is a representation of rate hike odds/expectations coming down this morning.

10-year yield (2m)  – this is another bonus for the mega-caps as lower yields create a more favorable environment, but their also going to look more attractive due to fortress balance sheets, especially compared to some of the banks.

Gold is acting as a safe-haven asset, and gold gains has been a reflection of the market expecting the Fed to end its rate hike cycle and tightening policy soon. Gold futures jumped +1.4% to $2020.60 as the banks crashed.

Gold futures (1m)

Bitcoin (futures +2.75%) caught a bid too…

BTC futures (1m)

Remember that larger bear flag developing in Crude oil I talked about Sunday and yesterday? It didn’t even have a chance to mature as Crude is down -4.2% (recessionary fears and broad risk-off tone).

WTI Crude Oil futures (10m) – look at the heavy volume on the decline this morning as well as price broke down.

We know it’s an ugly start. It seems to me the market is sending the Fed a message. Rather than spend much more time on this post, I’m going to get to work on figuring out, if, where, when the averages find an intraday low and whatever else of value we can clean from his train wreck.