SVB Fallout: 3 signs of growing financial stress
It's been a wild week for U.S. Markets to say the least, regional banks like First Republic Bank (FRC), PacWest Bancorp (PACW), and Western Alliance Bancorporation (WAL) are in the red once again today. Last week's collapse of SVB Financial Group (SIVB) and Signature Bank (SBNY) have left investors scrambling to identify other regional banks that have similar balance sheet issues.
Yahoo Finance's Jared Blikre joined Julie Hyman and Brad Smith to breakdown three signs that show we are in for more financial stress, including checking in on the CBOE Volatility Index (^VIX) and the strengthening USD/JPY (JPY=X).
00:00:25 :Three Signs of Financial Stress
00:01:25 Vix and Bond Market not in Pandemic Levels yet
00:02:00 U.S. Dollar vs Japanese Yen
00:02:30 Credit Market
BRAD SMITH: It's been a wild week for US markets, to say the least. Regional banks in the red once again today, as the collapse of Silicon Valley Bank last week leaving investors scrambling to identify other regional banks that have similar balance sheet issues. Our Jared Blikre has three more signs that we are in for more financial stress. Jared, what say you?
JARED BLIKRE: Yes, these are three signs-- and by the way, these are all available with the Yahoo Finance app and also on our desktop-- of not the apocalypse, but of financial stress. And the first one, ticker ^VIX. You go to our home page, you plug that into the search box, you're going to get the VIX, the fear index. And when we have rising volatility, as we have had very recently-- and this chart goes back several months here-- you can see, well, we've had a lot more stress in the markets.
Now let me just chart this real quickly for you. Over the long-term, VIX is a mean reverting asset. This goes back 20 years. And by the way, this is the global financial panic, that spike up there. And this is the pandemic. In between, we have some panics here that were relatively minor by comparison. But you can see now that we are still at depressed levels relative to historical norms. Take a look at the one-year chart of the VIX. We've had highs above 35. We haven't seen anything really north of 30, if only briefly, within the last few days to weeks here.
So we also have the VVIX. This is the VIX of the VIX. And this is a little bit more sensitive. This tracks the volatility of the VIX index itself. And this is showing a lot more volatility of volatility itself. So that can be another helpful indicator. Finally, this is ICE BofA MOVE Index, and this is like the VIX of the bond market, the Treasury market. And we can see this is quite elevated, not to the pandemic levels just yet, or actually, that might be-- yeah, the pandemic levels, and certainly not to the global financial crisis levels, but something we definitely want to keep track of here.
Now, we also have the Japanese yen. This is an indicator of crisis because in times of crisis, money flows into the Bank of Japan or flows into the Japanese yen. They are the ones to cut first. And they are the ones to hold out and raise their interest rates the last. So we have a strengthening yen. By the way, when this goes down, that is the US dollar getting weaker, and that is the yen getting stronger. If this is going up, that is the US dollar growing stronger-- the US dollar growing stronger, excuse me. So the ticker here is JPY equals X.
Now, finally, we also have credit markets. And you can see by all these down arrows that I'm dodging, you don't want to see this in the credit markets. But for this, we have a lot of fancy things in the credit markets and derivatives. But I go to the ticker HYG. Now, this is a high yield bond index. This is going to track the junk part of the markets. By the way, there's another ticker called J and K that does-- or HYG and J and K. They do basically the same thing. And you can see here, over the last 20 years, we've had some huge down spikes. Now, down means bad for the credit markets. That is the value of the bonds they represent. Those are decreasing as well. And when it's rising, that is a signal of risk-on.
So we are already at depressed levels, but let's take a look at a three-month chart. You can see, despite all the panic in the market, we really haven't seen HYG plummet. When we finally do see that capitulation, that's probably going to be a sign, just like a move into the yen, that we are very close to the bottom. But we are not seeing that yet. We have to see that, I would say, explode to the downside.
Now, one more thing with HYG, the Fed has an implicit put on this because over the pandemic, they were basically buying HYG and J and K to support the corporate bond market. So with that said, maybe these levels are reflecting that Fed put, but I still believe there will be a capitulation moment, and there are other indicators to indicate exactly how that will unfold.
JULIE HYMAN: But they're not buying that anymore. That's done, right?
JARED BLIKRE: No, that program is done. They are unwinding, or they may have already unwound those purchases. So they are definitely not in the market now, but they could make an announcement. And those announcements themselves are basically pricing in those facts for the market.
JULIE HYMAN: All of that-- all of this leads me to believe there's more downside, is the message I'm taking.
JARED BLIKRE: Unfortunately.
JULIE HYMAN: It's a painful one. Thank you,
JULIE HYMAN: Jared. Appreciate it.