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Good Morning, It’s Monday the 20th of March and I’m Will from Milford

Last week was a massive week in markets where we saw large swings in risk assets as volatility soared. The US MOVE index which measures volatility of US treasury bond options hit close to 200, a level only seen once before in 2008 since the index started in the 1980s. Another show of this was data showing flows of funds to money market funds spiked to over $100b last week, a top 5 weekly inflow going back to 1982.

The US 2yr bond yield moved over a 100bps lower during the week, an extraordinary move in what is the worlds benchmark of a risk-free asset. Adding to this was the 50bps daily ranges it traded, in almost unheard of moves.

The trigger of these moves was the collapse of US regional bank Silicon valley investment bank, which we discussed at length on last weeks podcast, after a run on deposits and large mark to market loses on treasury positions. This was then followed by Signature bank collapsing, and significant issues at First Republic bank over the weekend. In the US when these banks collapse they are taken over by the Federal Deposit Insurance Corporation who runs the administration process, and guarantees deposits up to 250k. However in this case, in an attempt to calm customer and investor fears, they agreed to pay out all deposits in full, regardless of size, funded by the government. The market took this positively as it signals that the US won’t let any banks fail, however it does pose some further issues.

In the US the regional banks fill an important space in the market where the major SIB banks don’t generally play. US banks with less than $250b in assets account for about 1/2 of commercial lending, 60% of residential real estate lending and 45% of consumer lending. It appears likely that access to credit is going to be more restricted going forward without these regional players, which has seen a number of economists reduce their GDP forecasts.

Bank issues weren’t just contained to the US, with Swiss lender Credit Swisse’ run of recent issues continuing. The stock plunged 25% on Wednesday night after their biggest shareholder , Saudi national bank, said that they would not contribute anymore funds to the struggling bank. Investors remain very nervous about the outlook as credit default swaps, insurance on the banks debt, continue to reach new highs. CS did get some reprieve, when on Thursday the Swiss central bank agreed to give them $50b in emergency loans to shore up solvency concerns, which saw the stock bounce back 20%, however concerns still remain about the longer term outlook.

The other key focus last week was the US February CPI data which was released Tuesday night. While headline CPI continues to drop, the month on month print surprised to the upside printing at 0.5% vs expectations of 0.4%. Both core and headline CPI continue to reaccelerate since bottoming late last year, in a trend that will concern the central bank with core CPI stubbornly high at 5.5%. Services inflation remains the main driver of inflation as goods and energy inflation eases.

While macro news continues to dominate the narrative, there was also some interesting stock updates here in Australia.

Small biotech Neuren Pharmaceuticals received their phase 3 FDA approval last weekend, for their drug to treat Retts Syndrome. This is a huge milestone, for the now only approved treatment for Retts, a neurological condition that mainly impacts teenage girls, as the drug can now go into production. There remains a number of further catalysts for global distribution deals, and other further promising drugs in their pipeline which investors are excited about. The stock soared to be up 72% on the week.

Bus operator Kelsian raised $281m to fund the acquisition of US Bus company, all aboard American for US$325m. All aboard America is a specialist transport provider running charter services for a number of companies including Apple, Google and Telsa. This is Kelsian’s first move into the US market, something the company has been looking to do for some time. The equity raise was done at $5.55 a 12% discount to pre raise.

This week the key focus is on the US federal reserves’ meeting. Post the events of the last week surrounding financial stability issues there is a fair bit of uncertainty about how the fed will proceed. Pre the SIVB issues emerging, the market had moved expectations towards a 50bps hike post a run of strong data prints. As of Friday the market is pricing no move, however amongst the economist community there is a fair dispersion of views around a pause, 25bp or 50bp hike. While the hike will be closely watched, the commentary from the Fed will be even more crucial. As the fed has been in blackout during this entire episode the market has little idea what their thoughts are, in a tricky situation balancing reaccelerating inflation and financial stability.

Thanks for listening and good luck this week.

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