Confused by today’s rally in equities? No worries. I attribute this relief rally to three factors:

1) A group of financial institutions – Morgan Stanley, Bank of America, Wells Fargo, J.P. Morgan – are in talks to deposit ~$20B in First Republic Bank (FRC). 

• This is not a bid to buy the distressed bank.
• It is an attempt to restore confidence in the regional banking system as a whole by entrusting FRC (a regional bank) with a significant amount of uninsured money (above the $250,000 FDIC limit). 

2) After touching a new 52-week low at around $65.50, Crude Oil WTI is recovering.

• The Biden Administration has officially stated its intention to refill the Strategic Petroleum Reserve (SPR) between the price range of $67 and $72.
• There is speculation that OPEC+ may cut production to prevent oil prices from falling further.
• As oil plays a crucial role in economic activity, its price often reflects expectations of economic growth. Therefore, stabilization in the price of the commodity can temporarily alleviate concerns surrounding reduced economic activity following a banking scare.

3) The US2Y yield has stabilized.    

• Lower rates typically act as a tailwind (positive catalyst) for equities.
• However, when treasury yields decline too quickly, it creates a universal sense of discomfort. This rapid decline, often called a “flight to quality” or “flight to safety”, occurs when investors indiscriminately buy risk-free, U.S. treasuries to flee riskier assets like stocks.
• Stabilization in treasury yields suggests that panic concerning the banking system may be subsiding.  

Although I welcome the calm and invite it to stick around, we need to recognize the situation remains fluid. Sentiment can change on a dime, for better or for worse. 

Set Your Watch For 4:30PM

To help restore confidence in the banking system, the Fed has started a new Bank Term Funding Program (BTFP). The Fed publicly discloses items related to the BTFP on the H.4.1 every Thursday at 4:30PM. The amount of assistance provided will influence investor perception of the situation’s severity, which has the potential to move markets.