The liquidation sales at Nordstrom stores across Canada will begin Tuesday.
The yield on the two-year Treasury note plunged in its biggest one-day slump in decades, while tech stocks rebounded from last week’s rout as the collapse of Silicon Valley Bank reverberated across trading desks.
In Monday’s chaotic session, yield on the two-year plunged by more than a half-percentage point logging the biggest three-day retreat since Black Monday of October 1987, as investors poured into haven assets. Some money managers have been taking profits in what may be a Treasuries short squeeze. The 10-year yield fell to a six-week low, while the dollar erased its gains for the year.
The turmoil has caused a swift reassessment over the direction of Fed policy. Swaps traders are now pricing in a roughly 50 per centchance the Fed will hike by another quarter percentage-point later this month. Goldman Sachs Group Inc. economists as well as asset managers at the world’s largest actively managed bond fund from Pacific Investment Management Co. are saying the Fed could take a breather on the policy rate following the collapse of SVB. Nomura economists took it one step further, saying the Fed could cut its target rate next week.
Expectations had weighed a hike of as much as 50 basis points after Chair Jerome Powell addressed lawmakers last Tuesday.
The S&P 500 closed the day down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of U.S. lenders, while reassuring depositors that their money is safe.
First Republic Bank plunged 62 per centas heightened worries about the state of U.S. regional banks triggered trading halts across the sector. The KBW Bank Index logged its biggest one-day drop since the start of the Covid-19 pandemic.
“Problem is that nobody wants to be the last one in a room turning off the light. In other words, as soon as there is a problem in one bank, fear is real. Immediately everybody starts to say, ‘wait a minute, should I also have my deposits at bank ABCD etc.?,’” Mayra Rodriguez Valladares, managing principal at MRV Associates said on Bloomberg TV.
“Bond yields go up, which signal to the rest of the market that there is an increasing probability of default and loss severity. Even if the bank is well capitalized,” she added.
Treasury Secretary Janet Yellen said her office would protect “all depositors” at SVB. The government actions will also include a new lending program that Fed officials said would be big enough to protect uninsured deposits in the wider U.S. banking sector. Still, the sudden closure of New York’s Signature Bank by state regulators Sunday underscored the urgency of stabilizing the financial system.
“Warren Buffett said once, when a tide goes out, we find out who’s not wearing swimming suits and we found out already three folks that weren’t wearing swimming suits,” Ralph Schlosstein, Evercore ISI’s chairman emeritus told Bloomberg Television. “Over the weekend, the Fed showed up at the beach and started handing out swimming suits to everyone.”
Wall Street’s so-called “fear gauge” spiked, with the Cboe Volatility Index rising above 30 for the first time since October.
Monday’s market moves come after risk assets got pummeled last week, with the U.S. stock benchmark suffering its worst week since September. Anxiety is also running high ahead of Tuesday’s consumer price index report.
Wall Street weighs in on the Fed’s next move:
We forecast a 25bp Fed hike, but Powell talk and high CPI point to close call. The threat to our views comes from Fed Chair Powell. While Powell opened the door to a large March hike, he did not walk through it, noting that the upcoming decision will be determined by “the totality of the data.”
The Fed decision will incorporate two additional factors. First, this week’s CPI report. Second, the Fed will consider the potential for financial stress to build.
— Marko Kolanovic, JPMorgan Chase & Co. strategist
The Fed has to be off the table for now. They pushed on rates until something cracked, well guess what? Something cracked.
To see QT stop would not be surprising, and maybe something to support the market. I think we’re back in crisis mode, and remember, to me, bank runs are way way way more important than inflation, so that’s what they’ve got to be arresting.
— Peter Tchir, head of macro strategy at Academy Securities
Pressure on banks dampens the rate outlook some, but decisive action on financial stability gives the Fed latitude to continue with rate hikes; 50 in March is not impossible as it would have been under a weak financial stability response and ongoing runs but looks very implausible – we still see 25 with a high bar to pause.
— Krishna Guha, Evercore ISI head of central bank strategy
Led by ex-Federal Reserve chair after the financial crisis, Janet Yellen, the comprehensive set of measures has helped to ensure that doubts over systemic issues in the U.S. banking system have been put to bed. With a speedy response to the crisis delivered, the Fed can get back to its day job of raising interest rates to deal with inflation.
— James Lynch, fixed income investment manager at Aegon Asset Management
Speculation about what the Fed’s going to do before we even see CPI is probably ill-founded. But if you look at the fed funds futures, they’re pricing in cuts in the fourth quarter and they’re pricing in the credible potential — like a 50 per centchance — that the Fed does nothing at the March meeting. So there’s too much noise around what else happens, what does this mean for monetary policy.
— Arthur Hogan, chief market strategist at B. Riley Wealth
Elsewhere in markets, oil dipped while gold rose on its allure as a haven.
Some of the main moves in markets:
The upscale department store chain has a store at the Rideau Centre mall as well as a Nordstrom Rack location at the Ottawa Train Yards shopping centre
The liquidation sales at Nordstrom stores across Canada will begin Tuesday.
A spokesperson for Nordstrom confirmed the impending sales period Monday in an email to The Canadian Press, just after the Ontario Superior Court of Justice gave the U.S. retailer’s Canadian branch permission to start selling off its merchandise.
The upscale department store chain that primarily sells designer apparel, shoes and accessories has six Canadian stores and seven discount Nordstrom Rack locations, including its Rideau Centre location and a Nordstrom Rack at the Ottawa Train Yards shopping centre, which sells merchandise at discounted prices.
When Nordstrom announced the move in early March, it said it expected the Canadian stores to close by late June and 2,500 workers to lose their jobs.
The company initiated the exit from the market because chief executive Erik Nordstrom said, “despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”
Nordstrom opened its first Canadian store in Calgary in 2014, followed by the Ottawa store at the Rideau Centre, which occupied the second and third levels of a former Sears location.
The Rideau Centre store has an alterations and tailoring shop and an energy drinks bar. Merchandise ranges from brand name to designer apparel, housewares, furnishings and beauty products, including brands such as Geox shoes, Gucci, Adidas and Adidas by Stella McCartney.
Later on came Nordstrom Rack, which made its Canadian debut in 2018 at Vaughan Mills, a mall north of Toronto. At the time, Nordstrom said as many as 15 more Rack locations could follow.
Nordstrom promised each Rack store would deliver savings of up to 70 per cent on apparel, accessories, home, beauty and travel items from 38 of the top 50 brands sold in its Canadian department stores.
Nordstrom had trouble with profitability because of its selection of products and the COVID-19 pandemic, said Tamara Szames, executive director and industry adviser of Canadian retail at the NPD Group research firm, a day after Nordstrom announced its exit.
“You would hear a lot of Canadian saying that the assortment wasn’t the same in Canada that it was in the U.S.,” she said.
She noticed Nordstrom started to shift its product mix away from some luxury brands around 2018 and saw it as a sign that the retailer was struggling to maintain its original vision and integrity.
The pandemic made matters worse because many stores were forced to temporarily close their doors to quell the virus and shoppers were less likely to need some of the items Nordstrom sells like dressy apparel because events had been cancelled.
Despite stores reopening and many sectors rebounding, Szames said the apparel business is the only industry NPD Group tracks that has yet to recover from the health crisis.
“The consumer has really been holding back in terms of spendâ¦within that industry.”
At a hearing at Osgoode Hall in Toronto, lawyer Jeremy Dacks, who represented Nordstrom, said the company has “worked hard to achieve a consensual path forward” with landlords, suppliers and a court-appointed monitor to find an orderly way to wind down the business.
The monitor, Alvarez & Marsal Canada, suggested five potential third-party liquidators and Nordstrom was approached by another five. The company decided to go with a joint venture comprised of Hilco Merchant Retail Solutions ULC and Gordon Brothers Canada, which were involved in the liquidation of Target, Sears and Forever 21 in Canada, Dacks said.
They will oversee the sale of merchandise, furniture, fixtures and equipment, but not goods from third parties, which removed products this past weekend, Dacks said. He added that all sales will be final and no returns will be allowed.
Lawyers for Nordstrom landlords Cadillac Fairview, Ivanhoe Cambridge, Oxford Properties Ltd. and First Capital Realty testified Monday that they were pleased with how “smoothly” and “organized” the process has gone so far.
In approving Dacks’ liquidation request, Chief Justice Geoffrey Morawetz agreed, saying Nordstrom is facing a “difficult time, but this process is unfolding in a very cooperative manner.”
Nordstrom required court approval to begin the liquidation because it is winding down its Canadian operations under the Companies’ Creditors Arrangement Act, which helps insolvent businesses restructure or end operations in an orderly fashion.
With files from Joanne Laucius
Canadian financial institutions’ regulator moved to reassure investors as the country’s riskiest bank debt joined a global selloff after the value of some Credit Suisse Group AG bonds was wiped out in the bank’s takeover by UBS Group AG.
Canada’s “capital regime preserves creditor hierarchy which helps to maintain financial stability,” the Office of the Superintendent of Financial Institutions said in statement on its website.
Prices of Canadian limited recourse capital notes, known as LRCNs, fell between 2 cents and 5 cents on the dollar Monday before OSFI’s announcement, according to people familiar with the matter who asked not to be named. That has widened the spread on the notes by over 60 basis points compared with Friday’s levels, the people said. Specific levels vary depending on the security.
The bonds are another form of so-called additional tier 1 securities, issued by financial institutions and designed to act as a shock absorber in the system. They can be converted to equity to bolster a bank’s capital if it runs into trouble.
Over the weekend, Swiss regulators triggered a complete writedown of 16 billion francs (US$17.2 billion) of Credit Suisse’s AT1 bonds as part of the rescue plan for the venerable bank. While it wasn’t a surprise that the bonds were likely to take a loss, some investors in the instruments were shocked to be wiped out when Credit Suisse’s shareholders were not.
Under Canada’s capital regime “additional tier 1 and tier 2 capital instruments to be converted into common shares in a manner that respects the hierarchy of claims in liquidation,” said OSFI, referring to a situation in which a bank would reach non-viability status. “Such a conversion ensures that additional tier 1 and tier 2 holders are entitled to a more favorable economic outcome than existing common shareholders who would be the first to suffer losses.”
“Our view is that we don’t expect LRCNs would be wiped out before common equity,” said Furaz Ahmad, a Toronto-based corporate debt strategist at BMO Capital Markets. “OSFI has said that they would convert to common equity, since that is more consistent with traditional insolvency norms and respects the expectations of all stakeholders.”
Earlier Monday, European authorities sought to restore investor confidence in banks’ AT1s by publicly stating that they should only face losses after shareholders are fully written down. AT1s from UBS Group and Deutsche Bank AG fell by more than 10 cents earlier on Monday.
Last week, oil prices booked their worst week since the start of the year, dropping off a cliff on renewed fears about the global economy after the collapse of two big U.S. banks and the near-collapse of Credit Suisse. While most price forecasts for the short term have been bullish because of pro-bullish oil fundamentals, now things are beginning to change. Tight supply, cited by virtually all forecasters as the main reason for oil price rise predictions, is giving way to fears of an economic slowdown that would dent demand and push prices lower.
Goldman Sachs has already revised its oil price forecast for the rest of the year. Previously expecting Brent to hit $100 in the second half, now the investment bank expects the international benchmark to only rise to $94 per barrel in the coming 12 months. For 2024, Goldman analysts see Brent crude at $97 per barrel.
“Oil prices have plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows,” Goldman said in a note last week, as quoted by Bloomberg. “Historically, after such scarring events, positioning and prices recover only gradually, especially long-dated prices.”
Indeed, as far as events go, this one left a serious scar. Brent crude went from over $80 per barrel to less than $75 per barrel, and West Texas Intermediate slipped down close to $65 per barrel. And this happened while authoritative forecasters such as the IEA and OPEC recently said they expect stronger demand growth than supply growth.
Related: Humanity On Thin Ice, Says Latest UN Climate Report
According to a recent CNBC report, 41 percent of Americans are preparing for a recession and with a good reason. Despite seemingly endless media debates about whether the world’s largest economy is in a recession already, about to enter a recession, or will manage to avoid a recession, forecasts are not looking optimistic.
“What you’re really seeing is a significant tightening of financial conditions. What the markets are saying is this increases risks of a recession and rightfully so,” Jim Caron, head of macro strategy for global fixed income at Morgan Stanley Investment Management, told CNBC earlier this month.
“Equities are down. Bond yields are down. I think another question is: it looks like we’re pricing in three rate cuts, does that happen? You can’t rule it out,” Caron said.
Reuters’s market analyst John Kemp went further in January when he forecast that one way or another, there will be a global recession, and debates are basically pointless.
Citing the cyclical nature of economic growth, Kemp foresaw two likely scenarios: one, in which recession begins earlier in the year as a natural consequence of events from the last couple of years, and another, in which central bank-pumped growth leads to even higher inflation, which then leads to a slowdown amid lower consumption.
Whichever scenario pans out, if any, it will lead to lower oil demand as recessions normally do. And lower demand will naturally depress oil prices, albeit temporarily. Because lower prices tend to stimulate demand, even amid a recession.
But there is one important detail here. The recession forecasts focus on the UK, the EU, the U.S., and Canada, as well as Australia. There is zero talk about a recession in China or India. Because China and India are going to grow this year, and as they grow, they will consume more oil. Meanwhile, the supply of crude is not going anywhere much further, it seems.
Be that as it may, just because oil demand from China and India, but most notably China, is seen higher this year, it does not mean higher oil prices are all but guaranteed. That’s because China’s economy is very export-oriented, and when consumer countries are in a recession or anything resembling it, these exports will suffer.
Forecasts for Chinese oil demand are still at record highs this year. OPEC said it expected demand from the world’s biggest importer to add more than 700,000 bpd this year for a total of 15.56 million bpd. The IEA, for its part, forecast that demand growth from China will push the oil market into a deficit in the second half of the year. Yet if a recession here or there dampens demand for everything coming out of China, all bets are off.
Because of oil’s fundamentals, all price forecasts are for higher prices towards the end of the year. But the basis for these forecasts came before the bank failures and the bailout of Credit Suisse.
Perhaps the baking panic will let go soon enough, and everything, including oil demand outlooks, will return to normal. Or perhaps the banking panic is a harbinger of worse things to come—things that will affect demand for everything, from crude oil to iPhones. Collectively known as a recession, these things may well prompt some very different oil price forecasts later in the year.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
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