A New New Dawn

Thoughts On The Weeks Gone - A new second-largest banking failure is currently racking the US and is filtering through the banking sector. First, SVB kicked things off with their high levels of exposure to underperforming bonds, and now the latest large-scale failure is that of First Republic. The bank ultimately failed as it experienced a large number of deposit withdrawals in one day, $40bn, brought about by the declaration of its release that customers had withdrawn $100 bn in Q1, which JP Morgan, the largest US bank, has bought out.

What has been commonly observed in the failure of both banks is a model that significantly underperforms in rising interest rate environments. SVBs mortgage bonds and treasuries / First Republics loan portfolio whereby providing cheap mortgages to its wealthy customers, leaving it exposed to significant losses with current rates pushing higher.

With the FED continuing onwards with its record hiking cycle and the EU likely to follow suit regarding a potential pause, the market is constantly discussing a downturn. If the US cannot raise its debt ceiling, we could be in for a far worse global recession than first imagined. (Unlikely, in my opinion, just as some banks are too big to fail, the US economy failing falls under the same category.) However, with continued pressure on the banking sector, we will likely continue to see the old additive of more debt solve everything.

If the definite of debt is that it never has to be repaid, then surely it's just free borrowing... right?

Red VS Blue

The fight for and against sustainability rages in the US at a new heat. Florida governor and presidential hopeful DeSantis has signed a series of anti-ESG measures into law, including the prohibition of considering ESG factors in state and local investment decisions.

In what is beginning to be quite a punch, when Biden vetoed the anti-ESG legislation previously, DeSantis has managed to pull together a coalition of 20 further states, coordinating their anti-ESG initiatives. Aimed at 'protecting Americans from a worldwide effort to inject woke political ideology into the financial sector.'

Meanwhile...

Further up the coast, New York will become the first state in history to ban the usage of gas stoves and heating, according to Governor Hochul. The state has already set targets to reduce GHG emissions by 40% by 2030 and at least 85% by 2050.

Additionally, the budget sets requirements to advance zero-emission constructions in new buildings, phasing out the use of fossil fuels in their entirety by 2029, with a few exceptions to critical infrastructure and food establishments.

My Thoughts - In the battle for ESG as a sustainability terminology and potential framework, the world's largest economy is taking big swings and chunks out of the ideology. Anjuli Pandit, head of sustainable bonds for EMEA & America at HSBC, stated that 'the future of sustainable finance in debt capital markets is not going to be obvious from the ESG framework.'

I am inclined to agree.

ESG in the US is a terminology that doesn't seem to be taking currently. After the election cycle, this may change. However, at present, we live in a world where those politically in power determine interpretations of sustainable investing, legislation, initiatives, and the extent to which they're propagated.

Can we talk about or even accurately project a shift to a more sustainable ecosphere when progression constantly shifts and changes due to a volatile political environment?

Not in my opinion.

Thoughts On The Weeks To Come - With CPI data coming out later today, markets are in a lull, indices remain relatively high, with room to the upside in the sightlines and Oil on the recovery from a plunge down to $64 a barrel. The latest banking crisis from First Republic having a reversal of effects than expected. Whilst initially bad, the market is pricing in the likely hood of a pause in the FEDs hiking cycle, warranted by the language we've heard.

A pause in the hiking cycle, even with rates as high as they are, will cause markets to spike to the upside, if only temporarily.

Politics are dominating the Western world at the moment, and sustainability will suffer for it, large amounts of tension in the US, fuelled in part by this idea of wokeness. The Tory government is under fire from every angle, and the French president is struggling to pass new legislation.

Throw into the mix the US debt deadline within a month, the future of 2023 is shaping up to be choppy, to say the least.

Have a Great Few Weeks Ahead.