The Overnight Report: Bank Bust

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            [0] => ((BHP))
            [1] => ((RIO))
            [2] => ((CSL))
            [3] => ((XRO))
            [4] => ((MYR))
            [5] => ((NAB))
            [6] => ((WBC))
            [7] => ((DOW))
            [8] => ((IFL))
            [9] => ((WTC))
        )

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            [0] => BHP
            [1] => RIO
            [2] => CSL
            [3] => XRO
            [4] => MYR
            [5] => NAB
            [6] => WBC
            [7] => DOW
            [8] => IFL
            [9] => WTC
        )

)

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Recouped

BHP Group’s ((BHP)) and Rio Tinto’s ((RIO)) dividends were alone worth a net -28 point handicap for the ASX200 yesterday, not even counting all the other ex-divs on the day, but the index opened down only -18 points and within minutes was back to where it started.

We recall that the futures suggested up 32 yesterday morning, so that was about right. Other than a failed attempt at a late afternoon rally, the index remained largely flat for the rest of the session.

The materials sector finished down only -0.9%, with BHP down -2.2% and Rio down -0.3%, while healthcare fell -1.5% after CSL ((CSL)) went ex and fell -2.2%.

Winners on the day were energy (+1.4%), following a 5%-plus bounce in the big coal miners, and technology (+2.7%), after Xero ((XRO)) announced 700-800 lay-offs and rallied 10.7%.

Consumer discretionary (+0.6%) got a boost after Myer ((MYR)) revealed department stores can actually make money. Who knew? A 100% increase in profit was largely online-driven nevertheless. While not in the index, Myer’s 18.3% rally gave retailers some hope.

Bond yields eased a little.

The banks rose 0.6% after National Bank ((NAB)) and Westpac ((WBC)) passed through the full RBA hike to mortgage rates, albeit tinkering with deposit rates as well. That’s nice.

But that won’t be the case today. There’s little point in me going any further given Wall Street has suffered a substantial bank sell-off that will no doubt flow through to our banks today. Our futures are down -81 points.

There is little reason why a sell-off in US banks should flow through downunder given the nature of the business of the bank that sparked the stampede. But unfortunately, that’s not how we operate.

No More Free Money

It was supposed to be a quiet day on Wall Street, with a crucial jobs report pending tonight, but it wasn’t to be.

Firstly, crypto bank Silvergate Capital – one of the two largest crypto banks in the US – announced it was shutting its doors. Yet another crypto company has bitten the dust.

Then SVB Financial, aka Silicon Valley Bank, announced it would need to raise capital, and its share price fell -60%.

That announcement sent a shiver through the US bank sector, triggering a sell-off mostly in regional banks but reaching right up to the mega-banks. JP Morgan (Dow) fell -5.4%, Bank of America fell -6.2%, and so the list goes on. The S&P500 financials sector fell -4.1%, to mark its worst day since the covid crash.

Was it, however, justifiable to sell off even the biggest banks, which in the wake of the GFC these days have more capital than they know what to do with?

SVB Financial is a lender to venture capital, start-up companies and crypto. Its borrowers are mostly profitless at this stage. It all worked rather well when money was free over the prior couple of decades, but a sudden jump in the Fed funds rate to 4.50-4.75% in one year has left these profitless companies with surging debt costs.

They keep telling us monetary policy works with a lag. Here’s your lag, or just one example of it. The SVB CEO rushed to assure clients the bank has “plenty of liquidity”. That’s akin to saying “the prime minister has my full support”.

The news also triggered a flight to safety into bonds. The US ten-year yield fell -7 points to 3.91% and the two-year plunged a full -19 points to 4.88%. Yet still the Nasdaq fell -2%.

The S&P500 crashed through its 200-day moving average without a blink this time. There was an attempt at a late comeback, but didn’t hold.

One issue genuinely impacting on US commercial banks is a loss of deposits, as savers look to better rates in US Treasuries. This puts pressure on their net interest income.

Australian banks are at least now offering deposit rates above the two-year bond yield, and competition in that space is now heating up.

Another notable factor with regard the big US banks, and whether they should be sold off in sympathy with the likes of an SVB Financial, is that they actually are not major mortgage lenders. That’s left mostly to smaller, less capitalised regional banks, which justifiably did take a hit last night.

The situation is completely the opposite in Australian of course, but aside from the RBA rate being much lower (3.60%) than the Fed rate, and the RBA preparing to pause as the Fed looks to ramp up, Australian banks are similarly over-capitalised.

Still, it might be a day to just stand out of the way.

For Wall Street, it’s now a very different set-up heading into tonight’s jobs report.

Commodities

China’s February inflation data disappointed yesterday, if you want to call it that. The CPI rose by only 1.0% (annual), down from 2.1% in January, well missing forecasts of 1.9%. The PPI fell by -1.4%, having fallen -0.8% in January.

Not exactly the signs of an economy roaring back into life post-lockdown. But the numbers are distorted by the Lunar New Year holiday, as they always are, and Beijing does not seasonally adjust its data.

The Aussie is a tad lower at US$0.6587.

Today

The SPI Overnight closed down -81 points or -1.1%.

The Bank of Japan meets today.

US jobs tonight.

Downer EDI ((DOW)), Insignia Financial ((IFL)) and WiseTech Global ((WTC)) go ex today.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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