Market staring at two snakes The fate of the dangerous game [Economic column from NY]

New York's financial markets are now trembling under the face of two snakes. Just like a frog. The first snake is a hedge fund that expects the price of stock prices to fall by a method called "short selling" in the wake of bank failures. The other snake is the politicians in Washington who are engaged in partisan conflicts while holding the national debt hostage on the US debt ceiling issue. Both are dangerous "games" that can wreak havoc on the market if one wrong step is made. Where is this game? (U.S. Bureau Reporter: Daisuke Ezaki)

Three banks were the next targets

The first snake, hedge funds and other speculators, are said to be aiming for the next step amid the financial turmoil caused by the bankruptcy of Silicon Valley Bank in March.

Three banks are now being targeted, all of which saw their shares plummet in early May.

May 5: -2% -27-4%

May 5: -2% -15-4%

May 5: -2% -7-4%

Banks with many unprotected deposits were targeted

One of the factors that these banks are seen as targeting is the percentage of unprotected deposits in their deposits.

Under the U.S. Deposit Protection System, you can only protect up to $1,1 per account in the event of a bank failure.

First Republic Bank, which went bankrupt on May 5, had an estimated 1% of unprotected deposits of $2022,25 or more at the end of 67, leading to the outflow of deposits, leading to bankruptcy.

The three banks also had
an unprotected deposit percentage of over 3% at the end of 2022 for Pacific Western Bank and Western Alliance Bank, and
50% for First Horizon Bank at the end of March 2023.

Money games fuel financial instability

Even so, why has the stock price fallen so much?

What is being whispered on Wall Street is a technique called "short selling" by speculators. "Short selling" is a transaction in which an investor who does not actually have shares borrows shares from a securities company and places a sell order.

New York Stock Exchange

It was pointed out that it was possible to make profits when stock prices were falling, which would contribute to market turmoil, and it was regarded as a problem at the time of the Lehman shock in 2008.

On the 9th, the Wall Street Journal, a leading American newspaper, published an article stating that short selling has become fashionable again on Wall Street.

From the perspective of hedge funds, banks that could expect prices to fall were easy targets for short selling, and it was a great opportunity to make a profit by borrowing as many stocks as they could borrow and selling short.

However, this is a dangerous "money game". This is because if a bank customer whose stock price plummets panics and withdraws their deposits, it will lead to the bankruptcy of the bank and further aggravate financial instability.

In fact, it was revealed on the 5th that Pacific Western Bank had outflowed about 1.9% of its deposits in the week to the 5th of this month, when its stock price plummeted, and concerns about the outflow of deposits of other banks also spread.

Analysts at a brokerage firm analyzing the American banking industry on Wall Street warn the following:

David Chebillini, Banking Industry Analyst at Wedbush Securities:
"Banking is a game of credit, and when there is a credit crisis, it can affect the foundation of real business. Markets are now putting pressure on the weakest banks. If there is a panic in the market and stock prices fluctuate downward, it could unsettle some depositors and lead to further outflows."

The Political "Game" of the U.S. Debt Ceiling

Another snake that is shaking up financial markets is Washington's politicians, including President Biden.

The U.S. debt ceiling issue has become a "political game" and continues to confront the ruling and opposition parties.

In the United States, there is a limit on how much the government can borrow, and it needs congressional approval to raise it. However, because the Democratic Party and the Republican Party have different views on fiscal discipline, it has often become a tool for political conflict.

President Biden meets with opposition Republican House Speaker McCarthy

In 2011, the stock price fell sharply due to concerns about default = default in the wake of the debt ceiling problem. Distrust of public finances led to the downgrade of U.S. government bonds for the first time in history, the selling of dollars in the foreign exchange market, and the rapid appreciation of the yen, plunging financial markets into turmoil.

An economic research company under the rating agency Moody's predicts that if US government bonds default, GDP = gross domestic product will fall by nearly 4% from the peak, and nearly 600 million jobs will be lost.

How dangerous are the two games of "short selling" and "political battle" over the debt ceiling? Neither of them is unrelated to our lives and assets in Japan.

Snakes have a terrifying impression, but on the other hand, since ancient times, they have been associated with resurrection and rebirth because of their molting, and are also said to be a symbol of good luck.

Will the two snakes turn into lucky beings for financial markets? I myself am skeptical, but I hope that the market will stabilize and "revive."

Upcoming

The US retail sales that will be released on the 16th are likely to attract market attention to how strong personal consumption is.

The G19 Hiroshima Summit will begin on the 7th. It will be interesting to see what kind of discussions will take place on the post-corona global economy, finance, climate change countermeasures, and the promotion of digitalization, including AI, where specific rule-making is an issue.