Regional Banks Rip Higher As Inflation Spooks Bonds, Bitcoin, & Bullion

Hotter-than-expected UK CPI spooked markets overnight but a lack of any really scary items in bank earnings (and NFLX big bounce back) offered BTFDers lots of opportunities today.

Small Caps outperformed (small financials heavy) as The Dow lagged (not getting green at all). Nasdaq and the S&P managed to squeeze back into the green. With about 15mins to go though, a major selling wave hit, dragging Nasdaq and S&P red and erasing most of the Small Caps gains…

TICK shows the sudden late-day wave of selling…

Source: Bloomberg

However, despite the bounce back in stocks, JPMorgan traders warned:

if the MegaCaps fail to change this quarter’s earnings profile, e.g., shifting expectations for EPS growth of -7% to perhaps flat/up, then we may be poised for a pullback in markets. Despite the moves over the last month, it is almost unanimous among client conversations that they remain bearish. What would change that view? A Fed pause/pivot and positive EPS growth are the two variables most commonly listed.

0DTE dominated the action once again. Early gains supported by a non-stop positive delta flow (dominated by call-buying not put-selling) but around 1140ET, put-buying started to accelerate (not call-selling) but stocks kept going higher (amid a classic short squeeze) which around 1345ET sparked a big cover in puts and sent the index to the highs of the day…

Source: SpotGamma

‘Most Shorted’ dumped at the open then ramped all the way back…

Source: Bloomberg

VIX plunged to fresh lows not seen since Nov 2021 (16.17 intraday lows)…

And VIX has slid lower as VIX calls have exploded higher relative to puts…

Source: Bloomberg

Regional banks shares surged to two-week highs despite reporting widespread declines in loan demand, ongoing credit tightening, and modestly rising mortgage delinquency rates.

But putting that in context, don’t get too excited…

The Big-4 US Banks also rallied recently (after earnings) and as we note below – rather oddly – found support at the level of market cap of the Big-4 Chinese bank stocks…

Source: Bloomberg

Debt Ceiling drama continues to ripple through market chatter as the T-Bill curve starts to misbehave, with a dramatic kink about a month out as anxiety over taxes (lower = sooner X-Date) get priced in…

In fact, as Bloomberg’s Cameron Crise noted this morning, that spread (which we track below using the generic 1m1m forward bill rate) isn’t completely accurate, because the dates of the May 16th (3.69%) and the June 13th (4.87%) bills don’t correspond precisely with those maturities.

But the sharp rise in the generic forward yield gives a pretty good indication of the kind of risk premium that’s been introduced into the bill curve –  it’s the highest since January 2, 2001, when the Fed funds rate was 6.5%.

Source: Bloomberg

Short-end Treasuries underperformed again with 2Y yields up 7bps (and 30Y yields unch) today…

Source: Bloomberg

2Y yields have just extended higher after breaking above 4.00% on Friday, now back at their highest since just after the SVB blowout…

Source: Bloomberg

Which sent the yield curve (2s10s) reeling back down to post-SVB inversion lows (still well off the record lows)…

Source: Bloomberg

May rate-hike odds topped 90% (for a 25bp hike) – new post-SVB highs…

Source: Bloomberg

The dollar ended higher against its fiat friends but all the gains were during the Asia and European sessions (with USD selling during the US session).,,

Source: Bloomberg

Crypto was puked overnight after the UK inflation data (amid considerable long liquidations) with Bitcoin plunging down towards $29,000 (hammered as it broke $30k)…

Source: Bloomberg

But Ethereum underperformed (after ripping higher relative to bitcoin since the ETH hard fork)…

Source: Bloomberg

Gold ended the day lower, but well off its lows as Gold futures found support and bounced back above $2,000…

Oil prices also ended lower, with WTI breaking back below $80 overnight after the inflation print. A choppy session though amid mixed data from EIA on inventories…

Finally, the fecal matter is starting to strike the rotating object in the corporate bond market as the yield spread between IG bonds and Fed Funds has collapsed to near record lows…

Source: Bloomberg

This, according to TD Securities, “heightened the risk of a correction in the US investment-grade corporate bond market.” And if IG bonds go, stocks won’t be standing around twiddling their thumbs. Although we do note that the pain in IG will likely be enough to force The Fed’s hand to pause or pivot sooner (but before you front-run it, The Fed won’t get there without the pain).