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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

DBRS analyst Carl de Souza answered some obvious questions by publishing the self-descriptive research paper Canadian Banking Sector: Market Volatility Continues, but Funding Is Stable and Unrealized Losses Appear Manageable,

“The Big Six Canadian banks lost approximately $57 billion (or 9.2%) in market capitalization over the past two weeks. We view these two significant U.S. bank failures as idiosyncratic and not representative of the Canadian banking sector … Generally have a lower exposure to fixed-income securities, diversified and stable funding, sufficient liquidity, prudent risk/liquidity management, and capital buffers that should enable Canadian banks to navigate current market turbulence. Nonetheless, we continue to closely monitor liquidity positions and exposure to fixed-income securities for banks in our rated Canadian bank universe. Additionally, credit default spreads in the banking sector have been widening and the volatility will likely result in higher funding costs that adversely impact profitability.”

“”the Big Six1 Canadian banks lost approximately $57 billion (or 9.2%) in market capitalization over the past two weeks” - (DBRS)” – (research excerpt) Twitter


BofA Securities research department answered what they believe are the five most important questions arising from the banking crisis in Issue #3: What’s next? Prepare for recession and buying opportunity, released Sunday

“1. What are the 2nd round effects from US regional banking failures? If regional banking issues are ring-fenced, tightening of lending standards and slowdown in credit creation would be consistent with our baseline outlook for a mild recession in the US economy later this year … 2. With money markets now yielding 4%, are we worried that money will flow out of equities into risk-free higher yielding assets? Cash has become an alternative (FMS cash allocation above 5.2% vs. 4.7% historical average), but there has been no equity capitulation so far. Michael Hartnett sees low yielding high-quality corporate bonds most at risk … 3. In the past, how has Fed reacted to financial crises when they are in the process of raising rates? Following the 1987 stock market crash and LTCM, the Fed cut rates and then raised them as things stabilized … 4. How do we position for recession? Michael Hartnett recommends cash and yield curve steepeners into a recession and a short in USD, credit, US tech, private equity, EU Lux, and defense stocks. But when payrolls go negative and the Fed cuts, the playbook changes again to secular winners of the 2020s … 5. Are we concerned that the Fed is trading short term stability for long term inflation? The Fed has never cut when core inflation is this high and unemployment is this low.”


Morgan Stanley U.S. equity strategist Michael Wilson urges clients not to be fooled by the Fed’s largess in stabilizing the financial system,

“This Is Not QE ... Once again, bond and stock markets seem to be diverging with their messaging on growth, with bonds seemingly pricing a hard landing and stocks still choosing a soft landing outcome. Part of this divergence is based on the view we hear from many that the Fed/FDIC back-stop of deposits equates to a form of QE and is therefore “risk on” for stocks. We disagree with that conclusion and think the focus should be on the more likely deterioration in growth due to the incrementally restrictive lending/credit environment that is now upon us. We also advise against the view that mega cap tech is immune to these growth concerns; we recommend positioning in defensive, low-beta sectors and stocks … Breadth Is Deteriorating ... We think it’s worth noting that performance breadth measures are breaking down broadly. On this front, we flag the material relative underperformance of the S&P 500 Equal Weighted Index vs. the Cap Weighted Index.Further, the cumulative advance/decline series for the Nasdaq Composite Index has fallen significantly over the past several weeks”

“MS’s Wilson ... still bearish” - (research excerpt) Twitter


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