Morgan Stanley to all ships: It's a bull trap, sell the bump!

Around the world tonight they’re whispering about banks in the same fearful tones as that dreaded evil wizard who gave Harry Potter such a hard time in those god awful books about being best and getting everything you want.

So. Bloomers puts the losses for financial stocks – around the traps at circa US$465 billion.

That’s almost half a trillion in market value in 2 x sessions on the back of the same god awful problem: American bankers, largely, trying to be best and get everything, everywhere all at once.

Losses from Monday on Wall Street continued about the place in our part of the world on Tuesday, as everyone else desperately tries to get to minimum safe distance from any US lenders exposed to the blowback of Silicon Valley Bank’s (SVB) collapse.

While we did pretty good – with ANZ Group (ASX:ANZ) probably the worst off, down 1.5% – things were a lot more serious in Japan, where Mitsubishi UFJ lost 9% in Japan It’s pretty hairy in South Korea too, where Hana Financial Group gave away 4%.

The MSCI Asia Pacific Financials Index has lost every penny of a promising 2023, losing well over 3% to be back where it was at the start of December.

Well. There’s always gold.

What next. Whose fault?

Now the flow on impact could go upstream, with banks and financial firms big movers on bonds and investments in other instruments which could get a few death wobbles while we wait for concrete action from upstairs.

US Treasury yields are all over the place. Whipsawing with each whisper of news. They plunged off the bat at the open on Monday as traders did the math on what it all means for their main obsession – the pace of rising rates over at the Federal Reserve.

“The financial markets are walking on eggshells,” John Woods, Credit Suisse Group AG’s chief investment officer for Asia-Pacific, told Bloomberg Television, when he probably should’ve been in the office minding the shop.

When the news of SVB’s impending implosion first crossed the Atlantic, Credit Suisse was out front leaping for joy at the prospect of snapping up some crippled financial sector bargains. “This is a buying opportunity,” Credit Suisse said in an excited, terrifically unself-aware note over the weekend.

Well they’ve copped the very worst of it now themselves, as shares in both EU banks and insurers paled under pressure.

‘Credit, where debt is due

CS stock was out front of that too, crashing and burning almost 10% to a record low during a calamitous first session of the week. SVB set the stage, but it was Credit Suisse’s own hubris which appears to by the catalyst – the Swiss investor saying it’s found “material weaknesses” in its reporting systems and is spring cleaning (scrambling for some kind of remediation plan), as we speak

Blithely unaware of the spot fires at home, John Woods got rolled out by management to point the finger and get down to what The Fed’s next step might be.

“We really need to know precisely what impact this is likely to have around the broader market,” he said. “My sense is that the Fed (The US Federal Reserve Bank) will probably pause because I think this is largely to do with liquidity risk.”

He’s not alone in that at least. Morgan Stanley’s chiefest US equity strategist, CIO Mike Wilson un-delicately pins SVB’s entire collapse and the Federal Deposit Insurance Corporation (FDIC) forced-move to shutter Signature Bank in New York on The Fed’s interest-rate increases.

The Process…

Is simple and we should know it well by now.

With the price of stuff (life) going up and the cost of borrowing rising to meet it, banks are discovering just how much of a concurrent acceleration in bank customer withdrawls there is this time.

It starts as a brisk walk to the local branch – in the case down Silicon Valley way, but when a certain percentage of the client base has drawn their deposits, a bank like SVB needs to start flogging its own assets to keep up with withdrawls, repayments and its own debts. by now word is out and we’re jogging, phone in hand.

What happens next is like gravity and time vs anything: the bank can’t keep up with the outflows, word spreads, suddenly the tipping point of customers pulling out their funds is reached, and the bank is done even before the full-fledged running begins.

The top investment honcho at Morgan Stanley isn’t mucking about. Wilson has told clients in a note this week to wait for, and then sell when any potential stock price rebounds (which should flow from the drip feed news developments of government intervention or regulatory support to quell, stall or staunch the rot) appear on the bourse.

And they will, son

Morgan Stanley has done this before.

“We suggest selling any bounces on a government intervention to quell the immediate liquidity crisis at SVB and other institutions until we make new bear market lows, at a minimum,” Wilson advises.

Wilson and Morgan Stanley are pumping the line that SVB and Signature Bank are not isolated occurrences and are rather the of a much wider systemic failure in the banks, as in the case of the 2008 financial downturn, but Wilson does think that SVB’s and Signature Bank’s failure will likely stifle economic growth.

“Rather than a random or idiosyncratic shock, we view last week’s events as just one more supporting factor for our negative earnings growth outlook,” Wilson says.

Wilson also reiterated his belief that the October stock rebound was likely a “bull trap” that caught bullish investors who were optimistic that the markets would improve after last year’s stock sell-off CNBC. Wilson instead believes the economic growth with remain slow and a low point is still ahead in the current market.

“In short, Fed policy is starting to bite, and it’s unlikely to reverse even if the Fed were to pause its rate hikes or quantitative tightening—i.e., the die is cast for further earnings disappointments relative to consensus and company expectations,” Wilson wrote.

What he doesn’t need to add is that by fanning the flames, MS and other circling sharks will be first in line to feed when the selling stops.

And there’s quite the potential buffet.

The First Republic

Last week, First Republic Bank and Western Alliance Banking corp both freaked out customers and investors by trying to reassure their customers and investors that everything was fine amid the still smokong wreckage of SVB and Signature Bank.

Trying to get out in front again of bad news, First Republic said in a filing with US. Securities and Exchange Commission (SEC) it ‘continues to hold strong positions’ in lots of liquid assets so just ignore the share price with its sudden and appalling case of dysentery.

By lunchtime on Monday, shares in First Republic Bank were down more than 65%.