Trading Insights: The US banking system might not be as safe as we thought, lots of hidden risk remains… hidden

Chart 1 Source: Tradingview April 27 2023 6:38 UTC

The above chart illustrates the percentage performance of the US100 US Smart Banks Index during the previous 52 weeks.

Market Talk

The US Fed’s current policy for increasing interest rates has had significant negative impacts on the value of government bonds and mortgages.

Key bullets:

• The US Federal Reserve responded to high inflation by increasing interest rates
• Banks are the largest holders of government bonds and mortgages
• Higher interest rates have created large losses for the banks that did not take effective risk management measures to hedge their government bond and mortgages exposures
• There are around 4,800 US banks and financial institutions holding long term assets such as government bonds and mortgages

Where is the hidden risk to the US banking sector?

To get a full picture of the situation across the US banking sector, investors need to look at the balance sheets of banks. A large part of most banks' balance sheets have “assets” or loans outstanding that borrowers borrowed from the bank. These loans or “assets” can typically account for at least half of a bank's long term balance sheet assets.

Banks are super sensitive to changes in interest rates, and as such must use hedging strategies to protect their balance sheet from losses. But what if the risk management teams at banks get it wrong and don’t do enough to offset the risk during an aggressive US Fed hiking period?

Price is a leading indicator

If price is a leading indicator that includes all of the known information about an asset, then what are the banking sector indices saying about the current state of the US banking sector (see chart 1)?

Mark to market hidden risk

Mark to market is an accounting term that refers to the “fair value” of an asset if it needed to be liquidated immediately.

Are banks reporting real market losses? Are all current banks really solvent? And what is the run risk if depositors decided to all pull their money out of the system at the same time?

Since most of a typical bank's balance sheet assets include long term assets that are traded over the counter price-driven market and not on an order-driven exchange market, investors may not fully understand the hidden real risk within the banking sector.

Trade safe. The above is a market commentary and personal view of the author.

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Upcoming Events:

Today’s economic calendar

• US Gross Domestic Product (GDP) for the previous quarter is expected to decrease

Asset focus: SPX500 Index:

• A strong drop in the index price this week has moved price below its 20 day moving average (bearish)
• Current price 4,070 with closest support seen near 4,050
• A break below 4,050 could open up the prospects for a further move lower towards 4,018
• On the upside, provided the 4,050 support holds, a short term “corrective” bounce towards 4,120 can not be ruled out

Source: Trading View April 27 2023 5:50 UTC

Earnings Season:

On deck today:

Last day to place orders in front of Amazon, and Intel earnings

• Amazon earnings due after the close of today’s US trading session, expected to earn $0.21 cents per share during the previous 3 months on $124.55 billion in revenue
• Intel earnings due and expected to show that they lost $0.16 cents per share over the previous 3 months.

Source: Trading View / US100 earnings calendar April 27 2023 6:12 UTC

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Today’s trading bullets

Amazon.com Inc: potential further upside “corrective” move?

Source: Tradingview April 27 2023 7:49 UTC

Amazon.com Inc.

• Current price on the weekly chart is above its 13 and 26 week moving averages (bullish). Rate of change 6 week and 13 week above their respective signal lines (bullish). Downside support seen near $88.12, while the prospects for a “corrective” move higher for a test of the 61.8% retracement from the 52 week lows near $121.69 can not be ruled out over the short to medium term (14-49 days).