A new tax year but the woes of the banking sector continued

Despite mostly reassuring results reported in April, in which they could justifiably claim that deposit outflows largely ended, the three banks suffered extraordinary share price declines. PacWest conceded that it was discussing strategic options with investors and fell further. Western Alliance categorically denied that it was in any such discussions and fell too. With banking statistics bearing out the claim that deposits at smaller banks have indeed stabilised, the sell offs seem unwarranted.

Interest rate decisions in the US and Japan

The recent increase in interest rates from the Fed could be viewed as potentially reigniting outflows. Those higher interest rates will be immediately available to investors in money market funds but are unlikely to be passed on by banks, particularly those holding low-yielding high quality bond assets that are trading below their redemption values.

Another potential headache for investors is the US government’s ability to service its debt payment. Unless the Treasury is granted authority to raise the statutory limit on US government debt, it will run out of money this summer - it seems even the White House isn’t immune from the cost-of-living crisis! On a serious note, in more recent developments, it appears that the Republicans (who are against tax rises) and Democrats (who are against spending cuts) are inching towards a deal.

In Japan, their central bank held its first meeting under new governor Kazuo Ueda, with little change to policy. They maintained their short-term interest rate and left the yield curve control policy unchanged. However, the Bank of Japan announced it would conduct a 12 to 18 month review of monetary policy, suggesting change is afoot.

Importantly, Kazuo Ueda left the door open for policy change to happen during the review period, which appears likely as it is important that the Bank of Japan surprises the market when it eventually abandons its yield curve control. If the policy is telegraphed too clearly, speculators will be able to profit by shorting Japanese bonds, forcing the Bank of Japan to pour more money into an overheating economy.

What is happening with the US stock market?

Turning to stock markets, the month of April saw the start of US earnings season. For context, certain sectors cluster their earnings reports at different times during earnings season. The first week tends to be dominated by financials, with the emphasis switching to technology in the second week. As it happens, and as highlighted in previous updates, these two sectors defined the first quarter in terms of market performance and sector performance.

Huge optimism surrounded financials as the quarter began, but ultimately led to frustration. Banks were to benefit from high net interest margins, or so the theory went, until the Silicon Valley Bank fallout. Investors, therefore, were relieved to find banks generally reporting strong earnings and meeting or exceeding analysts’ forecasts. Having underperformed during the first quarter, the sector bounced back during April.

Defensive stocks such as healthcare and consumer staples also performed reasonably well in April.

Expectations were less challenging and, in both cases, were largely surpassed. Consumers seem conditioned to expect price increases, which is making it easier for consumer staples companies to rebuild their margins faster than many feared. That’s good news for shareholders, but it is a potentially ominous sign for the Federal Reserve if it could indicate that consumer price increases are more persistent. Technology stocks lagged slightly, after a blockbuster Q1, but the messages from earnings were generally pretty reassuring.