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Volatility is Back with a Vengeance

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Job creation decelerated in February but was still stronger than expected despite the Federal Reserve’s efforts to slow the economy and bring down inflation. The U.S. economy unexpectedly created 311K jobs in February of 2023, well above market forecasts of 205K, pointing to a tight labour market.

The unemployment rate edged up to 3.6% in February 2023, up from a 50-year low of 3.4% seen in January and above market expectations of 3.4%. The U.S. economy continued to create jobs faster than most expected in February, but wage growth eased, and the average worker’s working hours fell, suggesting that the labour market is starting to cool.

The nonfarm payroll report was seen as playing an influential role in whether the Federal Reserve will resume its aggressive rate hikes given recent strong economic data. After the February’s job report the prospect of a 50-basis point rate hike at the next policy meeting on the 22nd of March were reinforced.

These expectations were short lived as the backdrop dramatically changed with three U.S. banks collapsing last week. The crypto lender Silvergate announced on Wednesday that it would be winding down operations and liquidating its bank. Silicon Valley Bank (SVB), a major lender to the tech startups, collapsed on Friday after depositors withdrew more than $42 billion following the bank’s statement on Wednesday that it needed to raise $2.25 billion to revive its balance sheet. New York based Signature Bank, with a strong crypto focus too, but much larger than Silvergare was closed by the State regulators on Sunday.

Global equity markets were spooked by the speed at which SVB, which is the 16th largest lender in the U.S. collapsed by customer withdrawals. More than $100 billion in market value were erased from U.S. banks last week, prompting quick action from government officials over the weekend in order to restore confidence in the financial system.

So what triggered the collapse of SVB? When interest rates were near zero, the bank loaded up on long-dated U.S. Treasuries. But as the Federal Reserve has been raising interest rates to fight inflation, the value of those assets has fallen, leaving the bank sitting on unrealized losses. The higher rates have lowered the value of SVB’s treasuries and other securities which the bank needed to pay depositors.

When SVB announced it had sold some of its securities at a loss to repay depositors and that would need to raise fresh capital to revive its balance sheet, that triggered a panic and companies started to withdraw their money fast, creating a classic bank run, causing the insolvency of the bank within days.

SVB’s collapse stems partly from the Fed’s aggressive interest rate hikes over the past year. Despite the panic selloff in global equity markets over the failure of SVB, investors are hoping there would not be broader repercussions to the broader economy.

U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of SVB threatened to trigger a broader financial crisis, announcing they would cover all depositors at SVB and Signature Bank.

The Federal Reserve also made it easier for banks to borrow from it in emergencies, in an attempt to prevent these collapses from having wider repercussions through both the tech and finance industries.

The last piece of crucial data before the Fed meets on the 22nd of March was the CPI released on Tuesday. U.S. headline inflation slowed again in February, but core prices continued to rise at an uncomfortable pace.

The Bureau of Labor Statistics said the CPI rose by 0.4% in February, a slowdown from 0.5% in January. The annual inflation fell to 6.0% from 6.4%, well below its peak of over 9% in June 2022. Core inflation rose by 0.5%, an acceleration from 0.4% last month. Therefore, the annual core inflation slowed much less than the headline rate, falling to 5.5% from 5.6% in February.

Despite the deceleration in inflation over the past eight months the current rate remains three times above the Federal Reserve’s targeted rate of 2%. The hot core CPI print shows the path to disinflation will be rocky and could take a long time to reach the Fed’s target.

Against the backdrop of strong U.S. economic data, still elevated inflation and banks failures last week, investors are trying to figure out the next move of the Fed. While the previous aggressive rate hikes are clearly starting to have an effect, Fed officials recently indicated rates need to go higher to contain uncomfortably high inflation.

Early last week a 50-basis point rate hike was almost fully priced in. However, last week’s shock to the finance system has raised questions whether the Federal Reserve will pause its rate hiking cycle when it meets next week.

Number of investment banks expect the Fed to leave rates unchanged as concerns about financial stability have risen. However, according to the CME FedWatch Tool there are 81.9% probability the Fed would deliver a 25-basis point increase next week.

Source: Tradingview

U.S. equity markets have been steadily declining since early February with the selloff accelerating last week. The CBOE Volatility Index (VIX) broke out of its trading range last week showing volatility is back with a vengeance. While a pull back to the breakout point was seen on Monday a subsequent spur in volatility could be expected in the short-term.

Active traders looking for magnified exposure to U.S. indices may consider our 3x Long US 500 and -3x Short US 500 ETPs.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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