Morning Wrap: ASX 200 set to bounce, US stocks higher as banking crisis fears ease

Major US benchmarks finished towards session highs led by banks and energy stocks, oil prices bounce 2% after falling to levels not seen since last December, banking turmoil drives financial conditions from loose to the tightest since March 2020, Amazon announces another round of job cuts and a closer look at the Nasdaq's recent strength.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 closes towards session highs as banks and energy stocks bounce (Source: TradingView)

MARKETS

• S&P 500 finished higher as banks and energy stocks bounce

• US 2-year Treasury yield whipsawed from session lows of 3.64% to 3.98%

• Oil prices bounce 2% after falling 13.6% in the previous five sessions

• Bearish talking points for the market include Fed won’t pivot given inflation pressures, BTFP not a form of QE, pickup in hard landing concerns and strategists still see consensus earnings forecasts as 10-20% too high 

• Bullish talking points for the market include market pricing in 100 bp of rate cuts through to year end, Fed balance sheet now expanding, banking turmoil not systemic, US Q1 GDP estimates moving higher and corporate cost cutting 

• Recent tightening of financial conditions estimated to be worth 150 bp of rate hikes as banks continue to tighten lending standards

• Big money captivated by banking drama as investors brace for more turmoil (Reuters)

• Morgan Stanley's Wilson says bank stress signals bear market end (Bloomberg)

• Fed and other central banks set joint liquidity operation (Reuters)

STOCKS

• New York Community Bancorp (+31.7%) surged after the FDIC announced that the bank’s subsidiary will assume nearly all of Signature Bank’s deposits

• Amazon (-1.3%) to cut 9,000 more jobs after recent 18,000 (CNBC)

• First Republic’s (-47.1%) credit rating downgraded from B+ to BB+ by S&P

• Credit Suisse (-53%) tanked after UBS agreed to buy the beleaguered bank for US$3.2bn

CREDIT SUISSE & UBS

• Relief over Credit Suisse deal fails to restore confidence as bonds rally (Bloomberg)

• Credit Suisse says $17bn debt worthless (Bloomberg)

• Investors say banking crisis far from over even after UBS's Credit Suisse deal (Bloomberg)

• UBS CEO says bank can handle risks of Credit Suisse takeover (Reuters)

ECONOMY

• China keeps lending benchmarks unchanged in March, as expected (Reuters)

• ECB Lagarde says financial market turmoil may do some of the bank’s work for it if it dampens demand and inflation (Reuters)

• RBA says bank stress just one consideration for rate policy (Reuters)

• RBA says Aussie banks are "unquestionably strongly" (Bloomberg)

Deeper Dive

Today's Deeper Dive was written by Hans Lee and Kerry Sun.

UBS buys out Credit Suisse

Anybody who works in financial markets has probably not had a break for two weekends now. It all culminated yesterday when UBS decided it would buy long-time rival Credit Suisse for CHF3 billion ($4.8 billion). But it's what's in the deal that is far more interesting:

• The Swiss National Bank will be the backstop. A CHF100 billion loan is being offered alongside the purchase price.

• The central bank is also offering an extra CHF9 billion to swallow any losses stemming from the deal.

• Shareholders will get a small payout for their risk, but AT1 (top-tier hybrid/fixed income) holders will not get anything back at all because these have been written down.

• Another CHF8 billion in cost reductions will now start at UBS, running until 2027

But as awful this deal sounds, there were really only two other options - bankruptcy (ie allowing the bank to fail) and nationalisation.

Is a central bank cut inevitable?

Andreas Steno Larsen argues the bond market is telling the Federal Reserve an emergency cut may be needed as soon as this week to stem the bleeding. And that's before we even talk about the long-inverted yield curve.

Source: Steno Research

Financial contagion is now the next question

Another Livewire contributor, Ray David from Schroders, believes the contagion risk is slowly dissipating (no doubt the UBS/Credit Suisse deal is a huge sigh of relief) but that recession risk doesn't magically decrease overnight just because the banking worries have mellowed a touch.

Source: Schroders

Nasdaq strength: Beneath the hood

The S&P 500 is down 0.5% in March while the Nasdaq is up 1.9%. The US market has been fairly resilient in the face of a big selloff in the banking sector thanks to tech outperformance.

Megacap tech stocks in particular have performed well and flagged as a safe haven trade. This has been supported by expectations of a Fed pivot, Fed balance sheet expansion and tumbling bond yields.

Underneath the hood, the number of Nasdaq stocks making new highs has been falling since February. What does this tell us: It's a flight to quality via a few big tech names while technicals have continued to deteriorate.

Source: Bonnie Gortler

Sectors to Watch

The ASX 200 has been hit a lot harder than US markets due to its weighing towards Financials and Materials. ASX 200 futures are currently up 0.65% but after an 8.8% fall from February highs, we've got a lot of work cut out for us. Is this just another bounce from oversold levels? Some sectors to note today include:

Oil: Energy was the best performing S&P 500 sector, up 2.11% thanks to a bounce in oil prices. Goldman judged its oil price target to US$90 a barrel by December 2023 to reflect softer fundamentals, lower demand and moderately higher non-OPEC supply. Nevertheless, the overnight bounce could see some relief for names like Woodside.

Copper: The Global X Copper Miners ETF rallied 3.4% overnight and copper spot prices rose 1.5%. This could see some positive flow follow through for local names like Sandfire, 29Metals and Aeris Resources.

Iron ore: Singapore iron ore futures have eased to US$124.8 a tonne from US$132 a tonne a week ago. That said, US-listed BHP and Rio Tinto bounced 2.0% and 2.8% overnight.

Broker Watch

Our broker watch today comes from Macquarie's thematic strategy team who argue a "Pavlovian rally" is in the works.

• Just as Pavlov’s dog reacts to a bell, investors react to Fed balance sheet.

• The Fed's emergency funding is not the same as quantitative easing. Any rally that comes from this won't last long, especially for the ASX given this is a US-centric issue.

• The reduction in the Fed's balance sheet does show up in Australian corporate earnings - usually by 12 to 18 months if past cycles are anything to go by.

Source: Macquarie Research

ASX corporate actions occurring today:

• Trading ex-div: Brisbane Broncos (BBL) – $0.015, Latitude (LFS) – $0.04, Reece (REH) – $0.08, Credit Corp (CCP) – $0.23, Cochlear (COH) – $1.55, Southern Cross Electrical (SXE) – $0.01 

• Dividends paid: Amcor (AMC) – $0.173, Tabcorp (TAH) – $0.013, Altium (ALU) – $0.25, MyState (MYS) – $0.115, Challenger (CGF) – $0.12, Computershare (CP) – $0.30, Hansen Technologies (HSN) – $0.05, Dalrymple Bay Infrastructure (DBI) – $0.05, REA Group (REA) – $0.75 

• Listing: None

Economic calendar (AEDT):

• 11:30 am: RBA Meeting Minutes

• 9:00 pm: Germany Economic Sentiment Index

• 11:30 pm: Canada Inflation Rate