A tug of war between hawks and doves

The selloff in US sovereign bonds reversed yesterday after a solid demand for the US 3-year bond auction counterweighed a bulk of hawkish comments from Federal Reserve (Fed) members.

The Fed members are on the battlefield, fighting the doves. Loretta Mester said there is no rush to cut rates and Neel Kashkari said that the Fed hasn’t reached its inflation goal yet. The game is now being played for a May cut, with around two thirds probability attached to it.

And there is one thing that keeps the doves resisting: the resurfacing US regional bank worries and a potential commercial real estate crisis. The New York Community Bank Corp plunged another 22% on Tuesday after Moody’s downgraded its rating to ‘junk’. What’s encouraging is that the KBW index gave no reaction to the latest shake, as proof that the Fed has been extremely successful in isolating the banking sector woes with liquidity and stopgap measures. What’s worrying is that these measures will expire next month. But what’s soothing is that the Fed could use them whenever needed to calm down the market nerves. Investors also bear in mind that the next move from the Fed is most probably loosening of financial conditions – that should help the sector as a whole. And the sole expectation of easing Fed is enough to juice the market’s mouth. This is certainly why the New York Community Bancorp’s misfortune hasn’t triggered a domino effect across the banking sector, and the winds could turn around before a crisis pops in the problematic real estate sector. That’s happy news.

Happy enough to push the S&P500 index a little higher yesterday as one regional bank extended its weekly losses to 50%. In the bright spot was Palantir – a data analytics company, jumped 30% after announcing AI-related revenue earlier than thought. Their commercial revenue soared by 70% compared to the same time last year as the deal flow rose to a level that no one expected before 2025.

Elsewhere, Snap fell 32% in the afterhours trading after disappointing Q4 revenue, but it’s too small to care, and BP, in London, flirted with the 200-DMA after revealing higher than expected profits, and saying that it will buyback $1.75bn worth of shares each quarter in the H1, more than the $1.5bn buyback announced a quarter earlier. Worth noting: BP posted strong first results under its new CEO, giving the company a certain margin to stick to its strategy of shifting toward renewable energy sources rather than boosting investment in fossil fuel and gas (for which they are being forced by investors because there is more money in fossil fuel and gas). And if things go wrong, BP can scrap its promise to do good to the planet and go back to doing good to investors pockets.

Hope is life

The CSI 300 index is up for the 3rd straight session on broad-based stimulus measures and anticipation for more as Xi Jinping is being briefed on ‘the heck is going on’ in the financial markets. To be true, I would love to be a fly in that room to see how officials are going to tell Xi that his radical change of mindset is responsible for the mess, and not the lack of money, or love for Chinese companies.

Confidence is low and the economy is fragilized by a deepening property crisis, falling population and deflation. China is expected to post a deeper y-o-y deflation when it reveals its latest CPI figures tomorrow. The market’s response may vary depending on investors’ perceptions of the effectiveness of the stimulus measures. A deeper than expected deflation could boost the stimulus expectations and help stocks recover – in which case it could be an early sign of returning confidence. OR it would smash the latest stock market gains and leave the Chinese authorities desperate for support. Pick your side.