Reply To: Traders Market Weekly: Neutralizing Contagion


BofA fund manager survey taken between March 10 and March 16 (i.e. prior to SVB)

– Financial Market Stability Risks Indicator surged to 7.7, highest since November 2022 & largest m/m increase since March 2022, shortly after Russia attacked Ukraine war

Bank Risk was not unexpected:
– Counterparty risk up to highest since May 2020
– Credit risk perception (default) had risen to its highest since Oct 2022.
– Counterparty and default risk combined reached its highest since May 2020 $CS #DB $SVB
– Counterparty risk perception jumped 25% m/m to a net 46% above normal, the highest since May 2020.
– Perception of credit risk surged 30% m/m to net 75% m/m above normal, the highest since Oct 2022
(Shows how bad $SVB $SBNY $SI were run that they did nothing & risk was known)

In terms of tail risks:
1 Systemic credit event 31%
2 Inflation stays high 25%
3 Central banks stay hawkish 15%
4 Geopolitics worsen 14%
5 Deep global recession 11%
(Again professionals expected it)

Noteworthy that only 1% expected stock market crash – our assumption is that means 1% chance of a stockmarket crash triggering rather than happening after.

What could lead to a credit event?
Most likely source:
1. US shadow banking 34%
2. US corporate debt 17%
3. Developed markets real estate 10%
4. China real estate 8%
5. European sovereign debt 5%
6. Global pension funds 3%
7. EM sovereign debt 3%
= (Again 1/3 expected it)

Cash levels rose to 5.5% in March, up from 5.2 % last month, in the first month-over-month increase since October 2022, and the largest since September 2022.

BoA said cash allocation has remained above the historical average (4.7%) continuously since December 2021:
“Over the period, the average cash allocation has been 5.7%. For 15 months cash levels have been above 5.0%. ….The only period that saw higher cash allocation for longer was the 32-month bear market in 2000-2002.”
(This as we have pointed out is a distinct difference to 2008/9 if not the COVID dump)

The most crowded trades this month:
1. Long European equities 19%
2. Long US dollar 18%
3. Long China equities 15%
4. Long ESG assets 15%
5. Long US Treasuries 12%
6. Long IG bonds 10%
(This explains much of the pain trade, thankfully long banks wasn’t crowded for fund holders)

BofA said sentiment/positioning “is consistent with prior major market lows. However, flows, private clients’ asset allocation, and BofA Bull & Bear Indicator remain well above levels seen in prior big lows. The indicator was at 3.4 or neutral.”

BofA said “FMS positioning/sentiment [is] the only key measures in ‘capitulation’ territory so far.”
In a nutshell this was not unexpected by many professionals, the quick response from FDIC, Powell & SNB suggests they were not surprised either. The political element the problem?