The Liquidity Crisis Has Gone? CITIC Securities: Fed Bombs May Hide in August

In March, we witnessed a bank from the sale of its assets to bankruptcy only takes 48 hours, and we also saw that it takes only one weekend for the risk to spread from the United States to Europe.

A globally systemically important bank like $Credit Suisse Group AG(CS)$ has been severely impacted, and the liquidity position is likely to escalate to a credit crisis.

After these accidents, global central banks shows clear attitude: risk prevention is the highest priority!

The U.S. Treasury Department, the Fed, the Swiss National Bank, and the European Central Bank have all stated that they can save, must save, and to save as soon as possible.

It is clear that the cost of rescuing the bank in trouble is indeed low, otherwise the serial bank runs will cause greater systemic risks.

Up to now:

$SVB Financial Group(SIVBQ)$ was acquired by First Citizens Bank at a discounted price of $16.5 billion to acquisition approximately $72 billion worthy assets, and $Credit Suisse Group AG(CS)$ was merged into $UBS Group AG(UBS)$ for CHF3 billion.

$First Republic Bank(FRC)$ is regarded as the most risky U.S. regional bank after the $SVB Financial Group(SIVBQ)$. U.S. authorities were considering expanding an emergency lending facility for banks to give $First Republic Bank(FRC)$ more time to shore up its balance sheet.

Behind the scenes, the authorities concluded that the $First Republic Bank(FRC)$ 's deposits were stabilizing and that it would not be subject to the same fate as Silicon Valley Bank, according to people familiar with the matter.

On Wednesday trading, $SVB Financial Group(SIVBQ)$ rose 146%, $First Republic Bank(FRC)$ +5.63%, $Signature Bank(SBNY)$ rose 36%.

The bank liquidity risks gone?

The risks on the bank side have been brought under control, the risk of contagion has also been weakened, and the attitude of the central banks is also very clear and positive.

The current situation:

The European Central Bank has made it clear that the euro zone has sufficient capital and good liquidity, and it can inject liquidity at any time if necessary. The sharp rise in short-term CDS is mainly due to concerns about tight liquidity.

The Fed has greatly expanded its balance sheet in the past 3 weeks, increasing its balance sheet by $394.1 billion, bringing its balance sheet back to $8.78 trillion. Liquidity is plentiful again. Seems there is no need to worry too much about this part of the United States for the time being.

So the systemic liquidity crisis is over?

The market blame that the Fed’s aggressive monetary tightening is the root cause of the current liquidity crisis in the U.S. banking system.

Afterwards, the deterioration of the relationship between supply and demand in the U.S. treasury bond market may become the fuse that ignites the next round of systemic financial crisis in the United States.

CITIC Securities Overseas Strategy Analyst pointed out that the debt ceiling increase may trigger a new round of systemic financial crisis in the United States, forcing the Fed to give up shrinking its balance sheet.

1) On January 19, 2023, the U.S. debt has reached its issuance limit of $31.4 trillion, and the current Treasury Department has launched "unconventional measures" to release funds. According to calculations released by the U.S. Department of the Treasury and the CBO, as of the end of January, the TGA balance and unconventional operations that the U.S. Treasury Department can use are about $730 billion, so it can still maintain the operation of the U.S. federal government for about 180 days. However, there are many uncertainties in the cash flow of the U.S. federal government, such as the upcoming U.S. April tax season and the federal government’s increasing interest payments due to rising Treasury yields. If the above variables eventually deviate from expectations, the X- Date has the risk of coming early.

2)The deterioration of the supply and demand structure of U.S. debt after X-Date may force the Fed to give up shrinking its balance sheet. Once the debt ceiling is raised, the U.S. Treasury Department’s accumulated demand for bond issuance since the end of 2022 will be released. The deterioration of the supply and demand pattern in the national bond market and the return of TGA funds may trigger a new round of systemic financial crisis in the United States. In late September 2022, a liquidity crisis broke out in the British government bond market, and the Bank of England urgently launched a temporary QE to re-inject liquidity into the market; It is similar to the 3 consecutive interest rate cuts by the Fed from August to October 2019, the stop of the shrinkage of the balance sheet in September, and the organic expansion of the balance sheet started in October. As of the end of December 2019, the Fed has injected nearly $170 billion in liquidity into the market through T-Bill purchases alone.

Source: City Journal

We judge that the development path of the U.S. debt ceiling issue this year may be similar to that in 2011, and panic may start to spread 10 trading days before the X-Date. will also be affected. We judge that the valuation of US stocks and the Hong Kong stock market cyclical sector may be under pressure, and the fundamental expectations of US stocks are also facing the risk of downward revision.