First Republic Bank needs a bailout

Dow (-0.7%)and S&P 500 (-0.4%) were pressured by banking and growth worries, while the Nasdaq (+0.5%) inched higher due to the strength of large-cap technology companies. Microsoft and Alphabet exceeded first-quarter earnings estimates. However, regional banks faced renewed pressure, with First Republic's (FRC) stock dropping by almost 30% after reports the bank could be facing borrowing restrictions from the Fed.

FRC is struggling for survival as there appears to be no favourable option available. Rescuing the bank would require regulatory support, government aid, or the cooperation of other lenders, but the gloomy economic situation, and poor lending choices the bank has made in the past make it a difficult case for the regulators.

The consortium of big banks that earlier poured money into FRC might not be overly enthusiastic about throwing more good money after bad. However, if nothing is done the regulators risk bank runs and soon they have another banking crisis in their hands.

Now the eyes and minds of traders will start to turn to the Fed’s rate-hike decision next week. Fed Funds Futures traders have priced in a 75% probability for a 25 bp rate hike while some analysts wonder whether the current policy has become overly restrictive given the stress among the regional banks. This could lead to the Fed taking a breather after next week’s rate hike.

DJ

DJ is mid-term bearish below 33 700. Above the level, the market could trade to 33 870. Yesterday DJ traded to the 33 330 level and beyond after the 33 665 was violated in yesterday’s trading.

We noted three days ago how companies’ inability to convert last quarter’s revenue increase into profits together with the high inflation the US economy is battling is a risk. Decreasing margins and reducing consumer purchasing power was and still is a very real risk for equity investors. The nearest major price levels to focus on are 33 272 and 33 665.

USOIL

USOIL traded down to the $74.40 measured move target we referred to on April 20th. We expected to see weakness in USOIL after the market had broken below a key support level (81.50). The market is now trading in the proximity of levels from where the market gapped higher when the OPEC production cuts were announced.

The gap is closed but the market remains in a bearish trend with the nearest key resistance level at 76.66. If there’s no buying interest around the 50% Fibonacci retracement level (74.40), the market could slip further to 73.

USDJPY

USDJPY turns bullish above 133.90 but only if the break above the level is decisive. Below yesterday’s low (133) the market probably trades down to the rising channel low (currently at 132.60).

The Next Main Risk Events

• USD Advance GDP
• USD Unemployment Claims
• USD Advance GDP Price Index
• USD Pending Home Sales
• JPY Tokyo Core CPI
• JPY BOJ Outlook Report
• JPY Monetary Policy Statement
• EUR German Prelim CPI
• JPY BOJ Press Conference
• EUR Spanish Flash CPI
• CHF SNB Chairman Jordan Speaks
• CAD GDP m/m
• USD Core PCE Price Index m/m
• USD Employment Cost Index
• USD Chicago PMI
• USD Revised UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets

DISCLAIMER: TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances, or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval.

Janne Muta

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