The mini banking crisis that commenced in the USA at the end of the first week of March put an end to any restrictive ambition on the part of the international central banks.
On closer inspection, as early as last November the monthly data relating to the main issuing institutions, the FED and the PBOC, recorded a stabilization of their respective balance sheets, meaning that the much-acclaimed phase of monetary tightening, in addition to having turned out to be much milder than expected, had already come to an end after 12 months.
The liquidity crisis of US regional banks and the illuminating episode related to Credit Suisse have cleared the field of any possible doubt that reducing liquidity in banking systems in the presence of worldwide debt close to $350 trillion was impractical. In practice, the pragmatic approach of the monetary authorities since March has followed a dichotomous policy, in the sense that on the one hand they have continued to moderately increase the cost of money in an anti-inflation key, while on the other a new phase of debt monetization has started, QE6, witnessed by the significant increase in the last two months of the balance sheet totals of the FED and the PBOC. To the observation made by some insiders both on the objective of the interventions, bank bailouts, and on the hit and run tactics of the same, which would not allow this phase to be compared to the previous QEs, one could object that even all the interventions that followed since 2009 have affected the banking systems, creating strong monetary inflation which has pushed up share prices. Traditional inflation, on the other hand, had not increased after 2009 thanks to the slowdown in the speed of circulation of money which instead increased after the interventions to deal with Covid, but has recently decreased again following the difficulties of the US banking system. If on the inflation rate front the situation appears to be under control, it is instead quite understandable that this new phase of liquidity creation is dosed very carefully, as we are trying to obtain a soft landing of the economic situation, and therefore, considering the significant time between the implementation of a monetary maneuver and its repercussions on the economic dynamics, a month of March characterized by a strong creation of liquidity was followed by a few weeks of its relative return. The real difference with the previous decade can be found in the competition that the yields on fixed income which have returned to satisfactory levels, at least on a nominal level, can have with equity investments. In terms of monetary policy, the date of the crisis of the US bank SVB, 8 March, also coincides with the expected use by the FED of the YCC tool, control of the yield curve, well demonstrated by the fact that it has since experienced a decrease in its negative slope of 50 basis points, reducing the gap between the two-year and 10-year yields to around 60 basis points from 110 at the end of February. As early as last December, the main stock market indices began to discount the hypothesis that monetary tightening was coming to an end, as evidenced by their positive dynamics up to the Ides of March.
With the mini banking crisis, a lateral movement of the same has begun, which has not broken the next technical support levels, but which poses to investors the dilemma of whether it is an accumulation phase rather than a distribution phase. The answer can be found by evaluating the two macroeconomic variables that will most influence the securities markets in the continuation of the year, inflation dynamics and the stability of the economic situation, considering that at the moment the hypothesis of a gradual return of the former seems to prevail while the probabilities of witnessing even a modest recession in the USA this year, seems rather remote, just think of the improvement in the labor market in April. Therefore, one could conclude that we are in a technical phase of accumulation, which would be negated only in the event of a break of the support located at 3950 points of the S&P 500 index. This hypothesis, which contrasts with the traditional weakness of the equity markets in May, would also find confirmation in the dynamics of demand, which after having concentrated during the first part of the year on large-cap stocks, now seems to have rotated towards medium and smaller caps.
Nicola Bravetti Data Source: Bloomberg
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