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Active Thinking

At GAM Investments’ latest Active Thinking forum, David Dowsett reflects on the events in the European financial sector, and which key data points to look out for.

27 March 2023

Last week was an extreme deleveraging event for discretionary macro. It seems that across the board, macro funds lost an immense amount of money during the course of March. The events in the European banking sector on Friday were probably a result of a combination of position squaring and the two most popular trades for discretionary macro throughout March which were short rates and long financials.

We saw a huge rally in the 2-year on Friday morning, reaching 3.6% at one point at the same time that Deutsche Bank was selling off 15%. This had every indication of being a position squaring event feeding through from CDS into equity.

From a fundamental perspective, the percentage of Deutsche Bank’s loan book exposed to US commercial real estate is low, the deposit base of the bank is not at risk and is well covered by liquid assets. The price action seems to be driven more by fragile sentiment than fundamental reality. However, if banks can rely on the protection that they have built up over the past few years, then they should be in a reasonable position.

The next steps in the banking crisis are largely dependent on policy action taken by the US authorities. The regional banks are still vulnerable to deposit outflow and I think we will probably need to see some more policy action there to fully address that. There are rumours of extra liquidity provision facilities by the Fed. Janet Yellen ruled out unilateral deposit insurance last week, but there is some talk of a systemic risk exemption order which means that if a bank fails, its deposits will be insured. That would not be full deposit insurance for the whole system but it would be an important step forward.

While the financial sector dominated the news last week, some of the activity data, at least on the services side, was more positive, particularly in Europe. There seems to be quite a lot of resilience in retail at this point generally. The final thing to highlight is China’s PMI data to be released on Friday will be important to build a picture of what is happening as it emerges from zero Covid.

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