Global Market Reaction to Escalating Tensions Between Hamas and Israel

Brandon Foster on December 4, 2023

Oil Prices Surge Amid Middle East Conflict

The global financial markets experienced significant fluctuations at the beginning of the week as tensions between Hamas and Israel escalated. This turmoil had a profound impact on various aspects of the market, including oil prices, stock markets, and the Israeli shekel.

Oil Prices React to Middle East Uncertainty

While Israel is not a major oil producer, the unrest in the oil-rich Middle East sent shockwaves through the investment landscape. Investors who had been shedding oil assets in recent weeks found themselves reconsidering their positions. Factors such as inflation, concerns about a potential global economic downturn, and a correction in oil prices that had been surging over the past months contributed to a decline in US oil prices from approximately $95 per barrel in late September to just above $80 per barrel the previous week.

However, on Monday, US oil prices rebounded, surging by 4% to surpass the $86 per barrel mark. Simultaneously, Brent crude, the global benchmark, saw a similar increase of almost 4%, trading at nearly $88 per barrel.

Israel’s Response to the Crisis

Israel formally declared war on Hamas after the militant group launched a deadly surprise assault. The conflict has already claimed the lives of more than 700 people in Israel and over 400 Palestinians, according to official reports. Concerns are mounting that the ongoing retaliatory strikes on Gaza could potentially draw Iran into the conflict, raising questions about the stability of energy flow in the region. Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, expressed these concerns in a note.

Israeli Shekel’s Decline and Central Bank’s Actions

The Israeli shekel faced a significant decline, reaching its weakest level against the US dollar since 2016, with an exchange rate of 3.92 to the dollar. In response, Israel’s central bank announced plans to sell up to $30 billion worth of foreign currencies to stabilize the shekel. Additionally, the bank stated its readiness to provide an additional $15 billion if necessary, all to ensure the proper functioning of the markets during this challenging period.

Impact on Equity Markets and Global Investors

Equity markets, which had initially surged following a strong American job market report, experienced a sharp decline late on Sunday. The Dow futures dropped by 175 points or 0.52%, while S&P 500 and Nasdaq futures were down by 0.7% and 0.8%, respectively. Global investors are apprehensive that the Israel-Hamas conflict could have broader regional implications, potentially disrupting the fragile global economic recovery.

European and Asian Markets React

European stocks also reacted to the news of the conflict, with France’s CAC 40 index down 0.6% and Germany’s DAX index dipping 0.8%. However, London’s FTSE 100 showed resilience, edging up by 0.1% thanks to gains in the shares of oil companies.

In Asia, the initial response among investors was mixed. China’s Shanghai Composite slipped 0.4%, Australia’s S&P/ASX 200 ended 0.2% higher, and Hong Kong’s Hang Seng index ticked up 0.2% after a morning suspension due to a typhoon. Notably, markets in Japan and South Korea were closed for holidays.

Uncertainty Looms Over Markets

As the situation unfolds, market analysts are closely monitoring whether the conflict remains contained or expands to involve other regions, particularly Saudi Arabia. While initial assumptions suggest limited scope, duration, and oil price consequences, higher volatility is expected to persist.

Strategic Moves in Volatile Markets: Investors Seek Refuge in Short-Term U.S. Government Bonds

Brandon Foster on December 4, 2023

In the midst of turbulent financial markets, savvy investors are finding solace in an unexpected haven, as highlighted by Goldman Sachs. This strategic shift centers on short-term U.S. government bonds, offering shelter from the storm of fluctuating long-term yields. In this article, we delve into this investment phenomenon and explore the rationale behind this strategic move.

Seeking Stability Amidst Market Uncertainty:

Investors, both institutional and affluent individuals, are flocking to short-term U.S. government bonds, driven by a desire to weather the ongoing turbulence resulting from surging long-term yields. Lindsay Rosner, the Head of Multi-Sector Investing at Goldman Sachs Asset and Wealth Management, sheds light on this noteworthy trend.

Surging Demand for 1-Year Treasury Bills:

The most compelling evidence of this shift is the recent auction of 52-week Treasury bills, which garnered remarkable attention. These short-term securities, boasting a 5.19% rate, experienced an astounding 3.2 times oversubscription, marking the highest demand witnessed this year. Rosner underscores the significance of this surge in demand, emphasizing, “They’re saying, ‘I’m now being afforded a lot more yield in the very front end of the curve in government paper.'”

Navigating the Long-Term Interest Rate Surge:

This strategic move represents a pivotal response to the escalating long-term interest rates that have unsettled the financial markets in recent times. The 10-year Treasury yield has been on a relentless ascent, reaching a 16-year high of 4.89% following a robust September jobs report. Notably, investors injected over $1 trillion into new T-bills in the last quarter, as reported by Bloomberg.

The Playbook: Capitalizing on Prolonged Rate Expectations:

Rosner elucidates the underlying strategy, which capitalizes on the expectation that interest rates will remain elevated for a longer duration than previously anticipated. If this sentiment holds true, longer-duration Treasuries, such as the 10-year bonds, are poised to offer more attractive yields in the coming year as the yield curve steepens. Rosner explains, “You get to collect a 5% coupon for the next year,” highlighting the allure of short-term stability. Moreover, she anticipates potential opportunities in longer-duration Treasuries and properly priced corporate bonds in the near future.

Untapped Potential in Fixed-Income Instruments:

While the 10-year Treasuries have experienced recent volatility, other fixed-income instruments, including investment-grade and high-yield bonds, have yet to fully reflect the shifting rate assumptions. Rosner suggests that, for the time being, these alternatives may not be the most favorable choice. However, they could hold the promise of lucrative opportunities down the road.

A Shift in Portfolio Strategy:

Ben Emons, the Head of Fixed Income at NewEdge Wealth, observes that the upheaval in longer-dated Treasuries has prompted professional portfolio managers to adjust the average duration of their holdings. He notes, “Treasury bills are in high demand,” highlighting the utility of 1-year Treasury bills for managing portfolio duration. Prominent financial institutions like BlackRock are among those adopting this strategic shift.

Takeaway:

In this volatile financial landscape, investors are rewriting their playbooks. Short-term U.S. government bonds have emerged as a key strategic move, providing stability in a sea of uncertainty. As the market continues to evolve, investors will closely monitor the dynamics of interest rates, ready to seize opportunities as they arise.

First Republic awaits bidders as FDIC deadline inches closer

Brandon Foster on July 6, 2023

First Republic — According to sources close to the situation, federal regulators are holding an auction for regional bank First Republic.

According to the source, the final bids for First Republic Bank are due at 4 pm on Sunday.

The auction

The auction will be handled by the Federal Deposit Insurance Corporation, the independent government agency that insures bank customers’ deposits.

A decision regarding a buyer for First Republic is likely going to be announced on Sunday evening.

As the market continues to endure stress, government officials typically try to announce solutions before global markets initiate trading.

Some Asian markets are usually scheduled to start trading at 8 pm on Sundays.

The bank’s shares

First Republic shares took a sharp decline, going from $122.50 on March 1 to around $3 a share last Friday.

There were expectations that the FDIC would get involved by the end of the day and take control over the San Francisco-based bank, along with its deposits and assets.

However, the move never materialized.

The FDIC already did something similar with two other banks in March, Silicon Valley Bank and Signature Bank.

The takeover occurred when runs on the two banks by their customers left lenders unable to make up for customer demands for withdrawals.

Potential buyers

In another report, The Wall Street Journal pegged JPMorgan Chase and PNC Financial among the prominent banks bidding on First Republic.

The reported bids are part of a potential deal that would follow an FDIC takeover of the regional bank.

“We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients,” said First Republic on Friday night.

If a buyer should come by for the regional bank, the FDIC would be stuck with money-losing assets.

The same thing had happened after it found buyers for viable portions of SVB and Signature after the FDIC took control of the banks.

Similar instances

During the financial crisis in 2008, which sparked the Great Recession, several shotgun marriages occurred under the arrangement of regulators.

They didn’t want significant banks to fall into the hands of the FDIC before it was sold.

For example, JPMorgan bought Bear Stearns for a fraction of its initial value in March 2008.

In September that year, it bought savings and loan firm Washington Mutual.

Bank of America later bought Merrill Lynch.

The downfall of Washington Mutual in 2008 was the largest bank failure in the history of the United States.

First Republic, a regional bank more prominent than Silicon Valley Bank or Signature Bank, is the second largest failure.

Not enough lifeline

Following the collapse of SVB and Signature in March, First Republic received a lifeline of $30 billion.

It came in the form of deposits from several of the largest banks in the United States.

They all came together after the intervention of Treasury Secretary Janet Yellen.

The banks that provided the lifeline include:

JPMorgan Chase
Bank of America
Wells Fargo
Citigroup
Truist

The banks agreed to take the risk and collaborate to keep cash flowing in First Republic, hoping it would provide confidence in the country’s failing banking system.

The banks and federal government wanted to reduce chances of other banks suddenly starting a mass withdrawal of their cash.

Although the cash helped First Republic get through the last six weeks, the regional bank’s quarterly financial reports were less than enthusiastic.

The disclosure of massive withdrawals by the end of March led to new concerns regarding its long-term viability.

Shaky depositors

First Republic’s financial reports showed depositors withdraw over 41% of their money from the bank over the first quarter.

Most withdrawals were from accounts that had more than $250,000, suggesting the excess funds weren’t insured by the FDIC.

Uninsured deposits at the bank dropped by $100 billion throughout the first quarter, a period that saw total net deposits dropping by $102 billion, excluding the infusion of deposits from other banks.

The uninsured deposits were at 68% of its total deposits around December 31, but only 27% of its non-bank deposits by March 31.

In First Republic’s earnings statement, the bank said insured deposits dropped moderately over the quarter and remained stable from the end of March until April 21.

Banks don’t have all the cash on hand to cover all deposits.

Instead, they take in deposits and use the cash to make loans or investments like buying US Treasuries.

When customers lose confidence in a bank and rush to withdraw their money, typically known as a “run on the bank,” it could cause a profitable bank to collapse.

First Republic’s recent earnings report indicates it was still profitable in the first quarter, with net income at $269 million, down by 33% from 2022.

However, the news of the loss of deposits concerned investors and regulators.

While others who had more than $250,000 in their First Republic accounts were likely wealthy individuals, most were probably businesses that needed the cash to cover daily operating costs.

Companies with 100 employees can easily need more than $250,000 to cover a biweekly payroll.

First Republic’s annual report said that 63% of its total deposits were from business clients with the rest from consumers.

Debt limit plan proposed by Kevin McCarthy in Wall Street

Alice Blake on April 24, 2023

Debt — On Monday, House Speaker Kevin McCarthy previewed a plan he hoped House Republicans could pass in the coming weeks.

McCarthy made a speech during the New York Stock Exchange that could raise the debt ceiling, saying:

“So here is our plan: in the coming weeks, the House will vote on the bill to lift the debt ceiling into the next year, save taxpayers trillions of dollars, make us less dependent on China, curb our inflation, all without touching social security and Medicare.

The plan

McCarthy’s proposed plan would serve as a marker of GOP demands in the middle of an impasse as two parties continue to argue on how to resolve the issue.

For now, there is no bipartisan agreement, and Democrats are still arguing that the debt limit should be lifted with no strings attached.

The Republican bill is not expected to pass in the Senate.

According to McCarthy, the GOP’s plan for a one-year debt limit increase would roll back domestic, non-defense spending back to levels seen in 2022.

McCarthy also said they would attempt to pass the GOP plan in the coming weeks.

The crowd

At the New York Stock Exchange, Kevin McCarthy touted the GOP proposal, saying:

“Simply put, it puts us on a fiscally responsible path in three ways: it limits, saves, and it grows.”

The House Speaker’s assurances came as a small group of protestors stood in front of the building, calling him out for plans to cut Medicare funding.

McCarthy repeatedly slammed President Joe Biden, criticizing what he believed was Biden’s unwillingness to negotiate.”

Without exaggeration, American debt is a ticking time bomb that will detonate unless we take serious responsible action,” said McCarthy.

“Yet, how has President Biden reacted to this issue? He has done nothing. So, in my view and I think the rest of America, it’s responsible.”

The White House responds

On Monday, the White House criticized Kevin McCarthy for the GOP demands.

Andrew Bates, the White House deputy press secretary, released a statement, saying McCarthy is “engaging in a dangerous hostage taking.”

Bates also said McCarthy failed to clarify what the House Republicans are proposing and would vote on, arguing that the House Speaker only referenced a vague, extreme MAGA shopping list.

However, White House officials will closely monitor if McCarthy could deliver on his promise: passing a bill in the coming weeks to raise the debt ceiling and curb spending.

A senior White House official said if the House Speaker achieves his plan, Biden would be open to meeting McCarthy.

The Republican dilemma

Although he is optimistic, it is a challenge for Kevin McCarthy to get 218 votes, and he can only stand to lose four votes.

“I know there’s a place where we can come to an agreement,” said the House Speaker.

“It’s just hard when people think that there’s not $1 that you can cut out of government spending today.”

Although McCarthy didn’t specify areas that the GOP plan to cut spending, he expressed wishes to tie a GOP energy package called HR-1 to the debt ceiling debate.

The plan passed the House last month.

It is looking to increase American energy production and grow the economy by rolling back on all of President Joe Biden’s climate policy.

Calling out Biden

Kevin McCarthy used quotes from former Vice President Biden regarding the debt crisis of 2011.

“He said, ‘You can’t govern without negotiating.’ Well, what changed, Mr. President? I agree with the former sensible Joe Biden,” he said.

“I agree with the former sensible Joe Biden. He knew that our government is designed to find compromise. I just wish the current extreme Joe Biden would listen to the former Joe Biden.”

The line prompted the only round of applause from the audience throughout his speech.

Recently, the administration reiterated their position in a statement from Andrew Bates, saying:

“There is one responsible solution to the debt limit: addressing it promptly, without brinkmanship or hostage taking – as Republicans did three times in the last administration and as presidents Trump and Reagan argued for in office.”

Kevin McCarthy urged Wall Street to pressure the current administration to undergo spending cuts.

“If you agree, don’t sit back, join us,” said McCarthy.

The House Speaker also said he wasn’t monitoring stock market conditions as he went into debt ceiling negotiations.

“Markets are reacting to work we’ve done, so I shouldn’t be monitoring you,” he told traders.

“I should monitor what we’re doing, and that’s exactly what I do.”

He also noted that markets are going up because the president ignored the markets for 75 days.

However, McCarthy didn’t elaborate on its connection to stocks going higher.

On Monday, markets were trading slightly lower.

McCarthy concluded his speech by invoking the drawn-out speakership battle.

“I will never give up. I will never give up on you, we will not rest until the economy is healthy.”

Tag: Markets