Did the FDIC Just Signal a Bearish Move?

Stocks are all over the place today as investors weigh the severity of the continued Covid-19 outbreak. This morning, the market opened lower on news that 45,000 new coronavirus cases had been confirmed in the U.S. on Tuesday. That’s the highest daily increase in infections since April 26th, when medical centers reported roughly 36,000 new cases in a single day.

Weekly jobless claims disappointed, too. The Labor Department announced that 1.48 million Americans filed for unemployment last week, surpassing the 1.35 million consensus estimate.

“No matter which way you look at it, over a million unemployed is a very bad thing,” Mike Loewengart, managing director of investment strategy at E-Trade, said.

“It will take some time to unwind the structural damage COVID has caused across the world. While it’s certainly uncomfortable, the everyday investor should be used to ongoing market volatility at this point.”

After Tuesday’s sell-off, bulls were looking for reasons to stay optimistic.

The Covid-19 resurgence and unemployment data did not help them in that regard.

What did encourage investors, however, was a decision by the Federal Deposit Insurance Commission (FDIC) to allow banks to make larger investments into venture capital funds. In short, banks won’t need to set aside margin for derivatives traders between common affiliates of the same firm.

The change should free up more capital for banks. In response, financials leaped higher.

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“When we think about a recession of the magnitude that we have, there’s going to be some credit write-offs by banks,” explained Art Hogan, chief market strategist at National Securities.

“The fact that they’re going to have more working capital makes markets breathe a sigh of relief.”

And though banks will likely generate higher returns with more working capital at hand, it also calls into question why the FDIC reduced the funds required for derivatives traders in the first place.

Is this simply an attempt to boost America’s ailing banks? Or is it the result of an “SOS” from the financial sector?

If anything, the long-term implications of today’s adjustment seem bearish. Short-term, banks will benefit, but reduced margin requirements may be another example of fiscal “lipstick” being applied to the banking sector, one of the U.S. economy’s many current “pigs.”

Potentially offsetting the FDIC’s announcement is a pause on reopening efforts in Texas. With Covid-19 cases rising in “The Lone Star State,” Texas Gov. Greg Abbott is preventing any further businesses from reopening. Those that had already opened back up over the last few weeks will be allowed to stay open.

“The last thing we want to do as a state is go backwards and close down businesses,” Abbott said via press release.

“This temporary pause will help our state corral the spread until we can safely enter the next phase of opening our state for business.”

Other states are likely to follow suit should new coronavirus cases emerge in greater number moving forward.

The decision to pause reopenings elsewhere could have major implications on the market. Even if an uptick in infections reveals a vastly reduced mortality rate for Covid-19 patients, investors will first focus on the fact that the pandemic isn’t going away.

Overall, the market’s facing more bearish influences than bullish ones. With stocks currently treading water, we seem to be just another bad news day (or two) away from a larger sell-off.

One that could drag down Facebook, Apple, Amazon, Google parent company Alphabet, and Microsoft – which altogether control roughly 20% of the Wilshire 5000 index’s total capitalization, and as a result, the destiny of the market.

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