“Fed hiking cycles always break something,” wrote BofA Securities investment strategist Michael Hartnett on Friday. This time, he said, it’s the U.S. regional banking system.
The crisis in U.S. regional banks has seen a flight of capital from this sector move into money market funds that have unusually attractive returns. All this is threatening financial stability and future economic growth.
U.S. commercial bank assets have declined by US$960-billion, or 5.3 per cent, of their total assets since the peak in April of 2022, noted Jefferies strategist Christopher Wood in his newsletter this week.
By contrast, money market assets increased by US$794-billion, or 18 per cent, for the same period. These funds, thanks to the latest Federal Reserve rate hike, can use the central bank’s reverse repurchase agreement facility to provide investors with yields over 5 per cent annually.
Mr. Hartnett might be overstating the case by calling the U.S. regional banking sector “broken.” The risk of further bank runs of the type that sunk Silicon Valley Bank and First Republic Bank are possible, although less so now that the Fed has provided emergency loan guarantees to meet deposit flight.
More generally, U.S. smaller and medium-sized banks are in a no-win situation. Their options are to either watch assets leave or raise deposit interest in a profit-crimping effort to compete with money market funds.
Canada’s banks have been largely unaffected by instability down south. The past year has seen the S&P/TSX Bank Index fall 7 per cent which, while not ideal, is much better than the U.S. KBW Bank Index’s 34 per cent decline. Both indexes hold both large and small banks.
The dominance of the major banks within the Canadian economy means they are unlikely to experience any U.S.-style instability. A buying opportunity could potentially arise if domestic bank stocks sell-off further in sympathy with developments in the U.S.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Aritzia Inc. (ATZ-T) The Canadian retailer’s shares plummeted nearly 21 per cent on Wednesday after issuing a disappointing outlook, making it another casualty of high inflation and stressed consumers. David Berman takes a look at what may come next.
The Rundown
Fed’s hiking pause may not signal all-clear for U.S. stocks
The end of a market-punishing rate hiking cycle may be in sight, but uncertainty over stock valuations and the economic outlook is keeping investors on alert for more turbulence ahead.
Just 6 per cent of clients say their adviser provides this vital service
There’s a bigger problem in the investment advisory business right now than the bad returns your portfolio produced last year. As Rob Carrick tells us, it has to do with delivering comprehensive advice.
Carl Icahn, activist investor, becomes target of short seller
Over nearly a half-century, Carl Icahn has shaken up Wall Street as a corporate raider and activist shareholder, making corporate titans bow down to his demands and change their business strategies. But Tuesday, his publicly traded company, Icahn Enterprises, became a target of Hindenburg Research, the short seller firm that has made its name in recent years by taking on Indian tycoon Gautam Adani and Twitter co-founder Jack Dorsey. The impact on Icahn’s stock price has been dramatic.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Nine North American technology stocks outperforming the sector
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Friday’s Insider Report: CEO and CFO are buyers of this stock that’s tumbled into oversold territory
What the charts say: Bullish on Kinaxis Inc.
Poll: Canadian dollar expected to rise closer to fair value
Globe Advisor
Why this money manager doesn’t foresee a recession and is hedging with growth and defensive stocks
How top women advisors are investing through the market noise
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Ask Globe Investor
Question: Can you explain the tax implications for unitholders of Summit Industrial Income Real Estate Investment Trust following its recent takeover?
Answer: In February, a joint venture between the Government of Singapore Investment Corp. and Dream Industrial REIT agreed to purchase Summit Industrial Income REIT for $23.50 per unit, or $5.9-billion.
The purchase price of $23.50 has two components: redemption proceeds of $7.15, and a special distribution of $16.35. The special distribution is estimated to consist of capital gains of $14.30 and ordinary income of $2.05.
The exact amount of capital gains (half of which are taxable) and ordinary income (which is fully taxed at your marginal rate) will be included on your T3 tax slip next year, so reporting them should be straightforward.
You will also have to calculate and report your own capital gain or loss from tendering your units. To do this, you would subtract the adjusted cost base of your units from the $7.15 redemption proceeds. If you get a negative number, this would indicate a capital loss (which will help to offset the capital gains in the special distribution). A positive number would indicate a capital gain. You may want to speak to a tax adviser to ensure you report the numbers correctly.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com.)
What’s up in the days ahead
The price of oil dropped to around US$70 per barrel this week. What does it mean for Canadian producers’ share prices? David Berman will share his thoughts.
Sell in May? World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
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Compiled by Globe Investor Staff