Macquarie: The Big Bank margin "honeymoon" is over

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

• S&P 500 - 3,980 (+1.83%)
• NASDAQ - 11,792 (+2.14%)
• CBOE VIX - 24.64
• US 10YR - 3.267%
• USD INDEX - 109.55
• FTSE 100 - 7,234 (-0.86%)
• STOXX 600 - 412.76 (-0.39%)
• UK 10YR - 3.033%
• GOLD - US$1,729/oz
• WTI CRUDE - US$81.89/bbl
• DALIAN IRON ORE - US$97.44/T
• SPI FUTURES - 6,759 (+0.53%)

THE CALENDAR

The Bank of Canada hiked rates by 75 basis points again last night, taking its interest rate to 3.25%. The outsized rate hike was expected by markets though, and bond yields didn't move an inch as a result. And, surprise surprise, it's not over yet.

And Ottawa's meeting and decision finalises two of the three major central bank decisions. The last one is the ECB, who we will hear from tonight. Will they go 75 basis points? And if they do, will that put a temporary floor under the sinking Euro/US Dollar cross-rate? Many of those questions will be answered at 10:15pm Sydney time.

Apart from the decision, there are plenty of central bank speakers to enjoy. From the RBA's Phil Lowe to Fed Chair Jerome Powell, it'll be discourse overload - as our tweet of the day shows.

the tweet

THE CHART

Today, the chart is focussed on Asia and specifically Asian foreign exchange. I know, I know. Hans, come on. Currencies chat - really? Stick with me on this. You will get something valuable at the end of it.

The US Dollar Index has been ripping higher like it's no one's business. Year-to-date, the index is up 15% in what has been a relentless run. Many of the major FX strategists on Wall Street also don't see a reason for this run to end just yet.

But one currency's gains are another's losses. And this is the problem that's being created throughout the world. In Europe, the Euro will fetch you less than 99 US cents for the first time since the turn of the millennium. 

In Asia the moves are even more pronounced. The Japanese Yen is at a 24-year low, the offshore Chinese Yuan rate (as supposed to the daily fix from the PBOC) is at 7:1 for the first time since July 2020, and the Philippine Peso is cratering as well. As for Australia, I'm going to let this chart do all the talking:

There is one glimmer of hope in this. A strong US Dollar is horrible for tech earnings (see Microsoft last quarter) and, in turn, a weak Australian dollar benefits our farmers, miners, and our manufacturers who export their products overseas.

Play accordingly.

STOCKS TO WATCH

Moves in bulk is the theme of today's stocks to watch segment - namely because it involves the Big Banks (regional and urban-centric). The fifth rate hike in a row from the RBA (and the fourth 50bps one) rang bells for the analysts at Macquarie Group. They argue that this rate hike is going to deliver some cold truths for the banks that haven't prepared its balance sheets for the new world order.

Here's the money quote:

The divergence between banks’ short-term and medium-term outlooks is reaching new heights. The upside in the next six months is driven by benefits from rising rates and lagging term-deposit pricing, but benefits aren’t likely to last. 

They also argue that the outlook for margins has been mispriced by the market and other analysts. Here is their medium-term analysis of the benefits rate hikes will bring to bank margins:

With all that in mind, here come the changes:

• NAB ASX: NAB is now preferred to Commonwealth Bank ASX: CBA, ANZ ASX: ANZ preferred to Westpac ASX: WBC 
• Upgrades for ANZ from Neutral to Outperform
• A preference and upgrade to neutral for Bendigo and Adelaide Bank ASX: BEN 
• A downgrade to neutral for Bank of Queensland ASX: BOQ  

TODAY'S TOP READ

I’d have to charge £100 for a steak to cover my energy bills, says Gaucho chief (The Telegraph): How much is too much for a piece of steak? Or put it another way - how much will a piece of steak have to cost because the overheads are too much? The head of three upmarket London restaurants has admitted that he nearly copped a £3 million bill had he not hedged his energy bills. And he's not alone. 

Today's report was written by Hans Lee. Chris Conway will write tomorrow's report.

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