Market action is extremely chaotic on Monday as traders and investors try to figure out all the repercussions of the failure of SVB Financial Group (SIVB) and the federal government's response to protect all deposits regardless if they are over the $250,000 FDIC insurance threshold.
The primary reason the Feds were willing to protect all deposits was that they wanted to stop runs on other regional banks with the implicit promise that they would act if necessary. Most banks do not have the same balance sheet issue as SIVB, but the whole group is being hit hard.
The SPDR S&P Bank ETF (KBE) is off its early lows but is down around 11%. Many regional bank stocks have had trading halts Monday morning due to the high level of volatility.
Even if the federal government is willing to completely guarantee all deposits, customers don't want to be in a situation where they have to count on that as the eventual recourse. In addition, it is very clear now that banks will need to be more competitive on interest rates if they hope to keep customers.
Most banks are going to see margin pressures even if they don't have to recognize losses on bonds they are holding to maturity. Banks are going to get hit on the basis of valuation alone, even if there is not a run on deposits.
The broader market is holding up fairly well despite the financials. Breadth is running about 3 to 5 negative, and news lows have ballooned to around 800, mainly due to financials. Biotechnology is showing some relative strength due to a couple of takeovers in the sector and some reassurance about exposure to SIVB.
The market is very focused on financials Monday and is counting on the Federal Reserve to back off on rate hikes in the near term, but the CPI report is on Tuesday morning at 8.30 am ET. If it comes in hotter than anticipated, then it is going to create a real dilemma for the Fed. Currently, the odds of a 0.25% hike on March 22 are at 64%, and there is a 35% chance of no hike at all, but that will change after we see the CPI report.
The good news about this action is that it is very inefficient, and many stocks are being sold without any regard to valuations or individual merit. There are some great opportunities that will become apparent in the fullness of time, but there is a very high risk of elevated volatility for a while.
I have my eye on some potential buys, but I don't want to do much until we see CPI and have a better idea of how the Fed will deal with this crisis.
