Finance

It takes two to make a market, which inevitably sets the scene for contradictory opinions. Yet rarely do the signals sent by different markets seem quite as much in conflict as they do today. Here is an incomplete list:Traders of futures linked to interest rates expect the Federal Reserve to raise rates on May 3rd, and then to cut them later this year. For six months expectations of rate cuts have caused the yield on ten-year government bonds to be lower than that of three-month ones—an “inverted” yield curve that, historically, has been a harbinger of recession.The stockmarket has shrugged off recession fears. America’s s&p 500 index has risen by 14% from its trough last October; the shares of some firms—such as big tech—have done much better.In March Silicon Valley Bank was brought down, as tighter monetary policy reduced the value of its bond portfolio. Since then falling rate expectations have caused bonds to rise in price. But bank stocks have barely recovered, suggesting investors remain gloomy. It is difficult to see how all these signals could be correct. Equally, it is difficult to see how they could all be wrong. Normally, the riskiest moments in finance arrive not when different sets of investors hold wildly contradictory views, but when large numbers of them are thinking along similar lines. Recall the near-universal fawning over tech stocks as the dotcom bubble inflated. Or the widespread delusion, in the run-up to the global financial crisis of 2007-09, that securitisation had transformed risky mortgages into safe but high-yielding bonds. In each case, the degree of consensus set the stage for a “pain trade”: a market convulsion that hurt virtually everybody at once. Yet even among today’s mutually exclusive opinions there is a scenario that would undo investors’ positions in every market at once. The pain trade of 2023 would be caused by a robust economy and sustained high interest rates.To see why, start with how professional investors are positioned. Every month Bank of America carries out a survey of global fund managers. April’s found them to be almost record-breakingly bearish, which on its own suggests a brightening outlook would wrongfoot many. This tallies with the contradictory signals from markets. In aggregate, fund managers have loaded up on bonds more than at any time since March 2009, pushing yields down. Nearly two-thirds think the Fed will cut rates in the final quarter of this year or the first quarter of next year. They are shunning the stocks of financial firms more than at any time since the first covid-19 lockdowns. Their top candidates for the most crowded trade are “long big tech stocks” and “short us banks”.Every one of these positions would be harmed by a strengthening economy and sustained high interest rates. Rising long-term yields would force bond prices down and wreck bets on the Fed cutting. Though banks’ bond portfolios would suffer, steady growth and an upward-sloping rather than inverted yield curve would boost their lending margins and help their shares recover. Without rate cuts, big tech firms would lose access to cheap borrowing, and the higher yields available on bonds would make the uncertain promise of future revenues less attractive by comparison. Their immediate earnings prospects might improve. But with valuations already sky-high, their scope to benefit from this would be limited.Admittedly, this scenario is far from the most likely outcome. The Fed itself thinks that rates will eventually settle at around 2.5%. Investors and pundits predicting ongoing hawkishness are vanishingly rare. Monetary tightening has already caused global markets to plunge, Britain to flirt with a sovereign-debt crisis and America to experience banking turmoil. The idea that the economy hums along even as rates stay high or rise further seems far-fetched.Yet monetary policy could also stay tight amid a slowing economy, and that alone would give investors a bloody nose. Inflation, though falling, remains unslain. Jerome Powell, the Fed’s chairman, is determined not to repeat the mistakes of the 1970s by giving up the fight against rising prices too early. And it is not only central banks that influence interest rates. As politicians squabble over America’s debt ceiling, the risk is growing that they miscalculate, trigger a sovereign default and send borrowing costs spiralling by accident. This might seem like a remote risk. But almost by definition, pain trades always do.■Read more from Buttonwood, our columnist on financial markets:Warren Buffett is shaking Japan’s magic money tree (Apr 20th)What luxury stocks say about the new cold war (Apr 13th)Stocks have shrugged off the banking turmoil. Haven’t they? (Apr 5th)Also: How the Buttonwood column got its name More

It is an idea so seemingly obvious as to need little elaboration: people’s feelings influence their behaviour. In the economic realm this truism helps explain why surveys of consumer sentiment garner attention. They are seen as predictive of spending trends and, by extension, the state of the economy. But pause for a moment to examine how exactly sentiment affects the economy, and the causal chain starts to look sketchier. At the current juncture, when many think America is on the brink of recession, this oft-cited but fallible leading indicator merits closer inspection.Understanding consumer spending is a holy grail for forecasters, since it accounts for about two-thirds of American gdp. Get it right, and the rest of the economy becomes much clearer. But the past couple of years have not been kind to those who focus on sentiment as a guide to future spending. The most closely watched index of consumer sentiment, published monthly by the University of Michigan, plunged to its lowest reading in more than four decades in 2022, and yet consumer spending remained resilient, even after accounting for inflation. This year, by contrast, the Michigan gauge has gained ground, and yet other indicators, including bond yields and lending flows, are flashing warning signs.The main explanation for why sentiment has been more of a misleading than a leading economic indicator is that inflation has outweighed much else in consumers’ minds. To generate their measures, interviewers ask people questions such as whether they think the economy is heading in a good direction and whether they are planning to make big purchases. Consumers tend to be gloomy when prices soar, as happened last year. They give short shrift to slightly more complex factors, such as the big stash of savings many accumulated during the covid-19 pandemic.But the gap between subjective pessimism and objective reasons for greater optimism highlights a quandary. The claim is that people’s feelings, whether justified or not, matter. When gloomy, they ought to spend less. If they contradict their own feelings and keep spending, then what exactly is the value of sentiment data?It is a question that has bugged economists since consumer surveys got going after the second world war. In 1955 the Federal Reserve examined re-interviews of respondents, conducted a year after initial surveys, to see whether expectations predicted subsequent expenditures. Officials concluded that they did not. Rather than that being the final word, however, the sentiment industry only expanded over the years. In 1967 the Conference Board introduced its own consumer survey. In the 1980s abc, a television network, started sponsoring a weekly version, which was later taken over by Bloomberg, a data and media firm. Morning Consult, a pollster, launched a daily survey in 2018. Evidently, there is a big market appetite for sentiment indices, whatever their flaws.To understand why, it is useful to consider a weaker case for such indices: not that they foretell the future but that they can reveal the present. An article in 1994 in the American Economic Review found that data on consumer confidence significantly improved forecasts of consumption growth when it was the sole explanatory factor. The problem is that when other variables such as incomes or employment were known, confidence data contributed little to the forecasts. On an intellectual level that is a damning assessment of the role of sentiment, showing that feelings by themselves have little bearing on the economy. But it indicates that surveys may have some use: sentiment reflects what people personally know about their incomes and their jobs, and it is these variables that ultimately influence their spending.Sentiment gauges are especially prized given the time lag in economic data. The University of Michigan, for instance, published its preliminary consumer-sentiment index for April on the 14th. The Bureau of Economic Analysis will not publish data on personal incomes for April until May 26th. But even in such instances, their usefulness can easily be overstated. Monthly variations in sentiment surveys tend to be minor and volatile, much like the variations in spending patterns that they foreshadow.A paper by the European Central Bank in 2011 found that sentiment indices were most useful in periods of upheaval. The bottom fell out of consumer surveys, for example, towards the start of the global financial crisis of 2007-09. Likewise, John Leer of Morning Consult notes that his company’s consumer index turned sharply negative in late February 2020, a month before the covid-induced downturn. Yet in truth, sentiment was far from the only sign that the economy was in trouble: a sharp sell-off in the stockmarket occurred at the same time, reflecting the barrage of bad news about the pandemic. Consumer surveys added to the picture of economic malaise. They hardly conjured it out of thin air.Head in the cloudsArguably the biggest virtue of sentiment surveys is simply that so many in the market monitor them. And it is not just investors. When the Fed raised interest rates by a whopping three-quarters of a percentage point last June—its first of four increases of that size—Jerome Powell, the central bank’s chairman, said that one factor was a jump in inflation expectations in the University of Michigan consumer survey. Duly informed, investors paid extra heed to the Michigan inflation reading for the next few months.Could the downbeat sentiment indices of the past year eventually look prescient? There is, beyond consumer surveys, plenty of reason to think that an American recession may be in the offing at last: fallout from banking-sector turmoil and the ongoing debt-ceiling debacle come just as the labour market is starting to cool. But as Zachary Karabell wrote in a book about leading indicators in 2014, the conclusion is a more frustrating one: “Sentiment gauges are right just often enough to make them compelling and wrong far too frequently to make them reliable.” You do not want to look at them too closely, even if you cannot make yourself look away. ■Read more from Free exchange, our column on economics:Is China better at monetary policy than America? (Apr 20th)How the state could take control of the banking system (Apr 12th)Why economics does not understand business (Apr 4th)Also: How the Free exchange column got its name More

London-based Barclays beat analyst expectations Thursday, reporting net profit of £1.78 billion ($2.2 billion) for the first quarter.
Higher rates boosted net interest income at Barclays UK, while the bank’s consumer, cards and payments division grew by 47%.
Chief Executive Officer C. S. Venkatakrishnan said the results were “strong” and would allow the bank to “customers and clients through an uncertain economic environment.”

The headquarters of Barclays Plc beyond the West India Quay Docklands Light Railway station in the Canary Wharf financial district in London, UK, on Monday, March 20, 2023.
Bloomberg | Bloomberg | Getty Images

LONDON — Barclays on Thursday reported net profit of £1.78 billion ($2.2 billion) for the first quarter, beating expectations and coming in 27% higher year-on-year.
A consensus Reuters poll of analysts forecast net profit at £1.432 billion.

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On a branch basis, income from the bank’s consumer, cards and payments division rose 47%, compensating for just 1% growth in its corporate and investment bank division. It partly attributed this to its acquisition of retailer Gap’s credit card portfolio.
The income of Barclays UK was up 19% due to improved net interest income.
The bank also flagged £500 million in credit impairment charges, which it said resulted from higher U.S. card balances and the “continuing normalisation anticipated in US cards delinquencies.”
Impairment charges are used by businesses to write off assets. In its previous results, Barclays said it set aside £1.2 billion for such charges last year, as its customers struggled with cost pressures.
Barclays shares were up 4.3% at 8:55 a.m. in London.

Analysts at Jefferies said the “robust” results suggested scope for consensus upgrades, with “not a lot to nitpick.”

On track

Barclays said it “remains on track to deliver its 2023 targets, with all performance metrics in line with or ahead of guidance” at the first quarter.
Chief Executive Officer C. S. Venkatakrishnan described it as a “strong” quarter, with income up 11% to £7.2 billion.
“The momentum across the group allows us to maintain a robust capital position, deliver attractive returns to shareholders, and support our customers and clients through an uncertain economic environment,” he said in a statement.
The results come after a turbulent period for the global banking sector, which saw the collapse of U.S.-based Silicon Valley Bank and several other regional lenders in early March and the rapid takeover of Credit Suisse by Swiss rival UBS.
Earlier on Thursday, Deutsche Bank reported first-quarter net profit of 1.158 billion euros ($1.28 billion), coming above a consensus forecast of 864.54 million euros.
The bank was briefly swept up in the banking volatility of last month, when its stock plunged and  credit default swaps — a form of insurance for a company’s bondholders against its default — rose sharply.
Market watchers are once more focusing on U.S. banks this week, after First Republic revealed heavier-than-expected deposit outflows in the first quarter, with its stock dropping to a record low. More

Net profit attributable to shareholders was comfortably above a consensus forecast of 864.54 million euros produced by a Reuters poll of analysts.
This marked an 11th straight quarter of profit for the German lender after the completion of a sweeping restructuring plan that began in 2019 with the aim of cutting costs and improving profitability.

A Deutsche Bank AG branch in the financial district of Frankfurt, Germany, on Friday, May 6, 2022.
Alex Kraus | Bloomberg | Getty Images

Deutsche Bank on Thursday reported a net profit of 1.158 billion euros ($1.28 billion) for the first quarter, emerging from a turbulent month that saw it swept up in market fears of a global banking crisis.
Net profit attributable to shareholders was comfortably above a consensus forecast of 864.54 million euros produced by a Reuters poll of analysts, and up from 1.06 billion euros for the first quarter of 2022.

This marked an 11th straight quarter of profit for the German lender after the completion of a sweeping restructuring plan that began in 2019 with the aim of cutting costs and improving profitability.
“Our first quarter results demonstrate the relevance of our Global Hausbank strategy to our clients and underscore that we are well on track to meeting or exceeding our 2025 targets,” said CEO Christian Sewing.
“We aim to accelerate execution of our strategy through a number of measures announced today: raising our ambitions for operational efficiency, boosting capital efficiency to drive returns and support shareholder distributions, and seizing opportunities to outperform on our revenue growth targets.”
The Thursday report nevertheless showed deposits fell over the course of the quarter to 592 billion euros from 621.5 billion euros at the end of 2022. The bank said the decline was “driven by increased price competition, normalization from elevated levels in the prior two quarters and market volatility at the end of the quarter.

Deutsche’s corporate bank net revenues came in at 2 billion for the quarter, up 35% year-on-year and the highest quarterly figure since the launch of its transformation program. Net interest income was the main driver, growing 71%.

However, the bank also flagged job cuts for non-client facing staff and reported a sharper-than-expected 19% year-on-year fall in investment bank revenues year-on-year.
“The bank is currently implementing additional efficiency measures across the front office and infrastructure,” it said in the report.
“These include strict limitations on hiring in non-client facing areas, focused reductions in management layers, streamlining the mortgage platform and further downsizing of the technology centre in Russia.”
Other data highlights for the quarter:

Revenues came in at 7.7 billion euros, up from 7.33 billion euros in the first quarter of 2022, despite what the bank called “challenging conditions in financial markets” during the quarter.
Provision for credit losses stood at 372 million euros, compared to 292 million euros a year ago.
CET 1 capital ratio, a measure of bank solvency, stood at 13.6%, up from 12.8% a year ago an 13.4% the previous quarter.

The beat on earnings expectations follows a 1.8 billion euro net profit for the final quarter of 2022, which vastly outstripped expectations and brought the bank’s annual net income to 5 billion euros. However, uncertainty around the macroeconomic outlook, along with weaker-than-expected investment bank performance, kept traders cautious on the company’s stock.
The market turmoil triggered by the collapse of U.S.-based Silicon Valley Bank in early March, which eventually resulted in the emergency rescue of Credit Suisse by UBS, briefly engulfed Deutsche Bank late last month despite its strong financial position.
Its Frankfurt-listed stock plummeted, while credit default swaps — a form of insurance for a company’s bondholders against its default — soared, prompting German Chancellor Olaf Scholz to publicly dispel market concerns.
‘Natural beneficiary’ of Credit Suisse demise
CFO James von Moltke told CNBC on Thursday that the March banking turmoil had enabled the bank to prove its mettle to a skeptical market.
“It was an interesting market environment in March, for sure. We were tested, and I think the silver lining of the test is we passed, and I think we passed with flying colors,” he said.
“The market was looking for vulnerabilities in banks with this surprise out of the U.S. regional banking sector. It was looking for securities losses, interest rate mismanagement issues, commercial real estate exposures, and many other sort of features.”
He suggested that, in scrutinizing Deutsche Bank, market participants saw a strong and profitable business model, stable balance sheet and deposit base, a “very moderate” and “well underwritten” commercial real estate book and “no near-term financing needs.”

“So across the various dimensions, when the market took a good look at us, what they saw was a stable, well-run well-risk managed bank,” von Moltke told CNBC’s Annette Weisbach.
In light of the emergency rescue of Credit Suisse by UBS, von Moltke also suggested that Deutsche Bank would be a “natural beneficiary of fallout” from the stricken Swiss lender’s demise.
“We admire the management team at UBS and we think that that competitor will be formidable with the passage of time but equally, a concentration of the banking relationships with now one provider for many of their clients is something that you’ expect to see them diversify,” he said.
“And we think we’re a natural destination for some of their clients, some of their people, some of the business, and I think we’re well-positioned to profit from that opportunity.” More

Executives at Klarna and Block say that proposed U.K. buy now, pay later rules, while well-meaning, are likely to do more harm than good.
The proposals would dramatically extend the time taken to make a BNPL purchase, resulting in disproportionate friction for consumers, they said.
The fintechs also believe regulation in its current form would create an unlevel playing field by excluding merchants and Big Tech firms from the scope of the laws.

Alex Marsh, Klarna’s head of U.K., said the proposals would lead to lengthened application times and result in “disproportionate friction” for consumers.
Daniel Harvey Gonzalez | In Pictures via Getty Images

The U.K.’s plan to regulate the buy now, pay later industry is “outdated” and will lead to worse consumer outcomes, executives at two of the industry’s giants said, vowing to fight tooth and nail to relax the proposed rules.
Bosses at Klarna and Block laid into the proposals at an event hosted by U.K. fintech industry body Innovate Finance last week, saying that the rules, while well-meaning, were likely to drive people toward more expensive credit options, such as credit cards and car financing plans.

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In a consultation paper published in February, the U.K. government suggested applying parts of existing regulation – namely, the Consumer Credit Act – to buy now, pay later plans. The currently unregulated buy now, pay later model would be supervised by the Financial Conduct Authority.
The CCA calls for a much greater level of information disclosure in the fine print of lending agreements. BNPL firms say this requirement would lead to “disproportionate friction” for people seeking short-term forms of credit.
Buy now, pay later loans allow shoppers to defer payment by a month or to split the cost of their purchases over a period of equal monthly instalments. What makes them attractive is the ease with which someone can apply for a loan, and the fact that they are often interest-free – so long as you pay on time.
If someone currently uses buy now, pay later at an online checkout page, they can expect to complete the purchase in a minute and a half, versus 30 seconds for credit cards, Alex Marsh, Klarna’s head of U.K., said on a panel at Innovate Finance Global Summit. Based on Klarna modelling, that could increase to five minutes under the new U.K. rules, Marsh said.
Another disagreement BNPL firms have is that the present framework excludes certain firms from the scope of the laws. Merchants, for example, “would be exempt from FCA regulation (as credit brokers) where they offer newly regulated agreements as a payment option.”

Some firms might choose to withdraw from the U.K. market once they work through the costing. There is a risk of it being too expensive. I think it is a risk. It’s not like red alert – probably amber.

Adam Jackson
head of public policy, Innovate Finance

The government takes that view because it doesn’t want to subject individual traders and small businesses to the same treatment as large fintechs. BNPL firms say that risks creating an unlevel playing field.
“We know there are some very large retailers and very large tech businesses that have the capacity to offer buy now, pay later services to their customers directly. And we just don’t think it makes sense to exclude those from the scope of regulation,” Michael Saadat, international head of public policy at payments company Block, said on the panel.
Formerly known as Square, Block acquired Australian BNPL firm Afterpay — known as Clearpay in the U.K. — in a $29 billion deal in 2020.
Speaking on the sidelines of IFGS last week, Adam Jackson, head of public policy for Innovate Finance, told CNBC there was a risk that some BNPL firms would leave the U.K. market, if the current rules continue.
“Some firms might choose to withdraw from the U.K. market once they work through the costing. There is a risk of it being too expensive” to operate in the U.K., Jackson said in an interview. 
“I think it is a risk. It’s not like red alert – probably amber,” he added.
“The current proposals do not reflect the simple and transparent nature of BNPL products, and will create an unlevel playing field,” a Block spokesperson told CNBC.
“The U.K. has an opportunity to take a leadership role in developing BNPL regulation that supports innovation, competition and good consumer outcomes,” the spokesperson added.
A spokesperson for the U.K. Treasury department said: “These products can help consumers manage their finances when used appropriately, but we want to strike a balance to protect borrowers from falling into problem debt.”
“We’re proposing a tailored approach to the information lenders need to give consumers so that terms are clear and consistent, without causing delays,” the Treasury spokesperson added. .
The Treasury opened its consultation on the draft of buy now, pay later legislation in February. The deadline for firms to submit their responses was April 11.
The prevalence of BNPL during the pandemic led to a rush among big companies to offer their own services for consumers. A host of big names in banking and tech — from Apple to Barclays — now offer their own interest-free installment products. 
The payment method is particularly popular with younger people. Consumer rights activists have tried to highlight the risks of BNPL to consumers, saying it encourages people to spend more than they can afford. They believe the sector urgently needs regulation. 
For their part, BNPL firms say that they would welcome regulation. Klarna made a number of changes to its business in anticipation of the looming regulation, including formal credit checks on clients.
It’s worth noting that any regulation is unlikely to arrive for some time yet. The government is expected to review consultation responses before finalizing the proposals. The rules then need to be voted by U.K. lawmakers. Innovate Finance’s Jackson said he expects they will come into effect within 12 months. More

Visitors take photos in front of the Meta (Facebook) sign at its headquarters in Menlo Park, California, on December 29, 2022.
Tayfun Coskun | Anadolu Agency | Getty Images

Check out the companies making headlines in extended trading.
Meta Platforms — The Facebook parent popped 9% after announcing better-than-expected top-line results. Meta posted $28.65 billion in revenue, topping analysts’ $27.66 billion estimate, according to Refinitiv data. Meanwhile, the company’s metaverse venture Reality Lab recorded almost $4 billion in operating losses. 

Roku — The TV streaming platform rose 2% after mixed first-quarter earnings. Roku lost $1.38 per share, while analysts had expected per-share losses of $1.37. Revenue topped estimates, coming in at $741 million versus analysts’ estimate of $708.5 million. Roku also raised its outlook for its current-quarter revenue to $770 million, coming in higher than Wall Street’s estimate of $768 million. 
Ebay — The e-commerce platform jumped 5.1% after first-quarter earnings and revenue beat estimates. Ebay earned an adjusted $1.11 per share, better than $1.07 estimate, and revenue of $2.51 billion, against a $2.48 billion estimate, according to Refinitiv data. Ebay said it sees second-quarter per share earnings between 96 cents to $1.01, while analysts had estimated 99 cents per share. Ebay’s estimated current-quarter revenue of $2.47 billion to $2.54 billion topped analysts’ consensus projection of $2.43 billion. 
Align Technologies — The orthodontics stock lost 5% Wednesday in after hours trading. The company’s first-quarter earnings and revenue came above analysts’ estimates, according to Refinitiv data. Align shares have already climbed 68% year to date going into the report.
ServiceNow — The digital workflow company rose 1.2% after first quarter earnings came in above Wall Street’s expectations. EPS of $2.37 topped analysts’ estimates by 33 cents, according to Refinitiv. The company posted $2.1 billion in revenue, against an estimate of $2.08 billion, and second-quarter and full year subscription revenue guidance was higher-than-expected.
First Republic Bank — Shares fell 1.6% Wednesday postmarket, after sliding almost 30% during regular trading. The selloff in the troubled regional lender has gained steam since Monday, when it reported significant deposit flight in the latest quarter.KLA — The semiconductor equipment manufacturer dropped 2.4%. While the company’s quarterly earnings and revenue came in above analysts’ estimates, fiscal fourth fiscal quarter earnings and revenue guidance missed expectations, according to FactSet data.  
Pioneer Natural Resources — The oil and gas company fell 2.2% after first-quarter earnings topped estimates while revenue missed. Pioneer posted per share earnings of $5.21 versus analysts’ $4.86 estimate, while revenue of $4.54 billion compared with an estimate of $4.89 billion, according to FactSet data. Total cash flow and cash flow per share was a little light of estimates. Pioneer also announced plans for a new CEO to lead the company by the end of 2023. More

The Microsoft logo displayed on their stand during the Mobile World Congress 2023 on March 2, 2023, in Barcelona, Spain.
Joan Cros | Nurphoto | Getty Images

Check out the companies making the biggest moves midday:
Microsoft — Shares of tech giant Microsoft gained 7.24% Wednesday after a better-than-expected earnings report a day earlier. Analysts have added to bullish sentiment on the stock as Microsoft delves deeper into artificial intelligence investments and integration with Azure.

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Alphabet — Shares of the Google parent rose about 1% in midday trading after reporting earnings that beat expectations, however they closed down 0.13%. The company earned $1.17 per share on $69.79 billion in revenue, while analysts polled by Refinitiv expected it to earn $1.07 per share on revenue of $68.9 billion. The company also announced a $70 billion share buyback.
Amazon — Positive tech earnings also helped lift Amazon shares 2.35% ahead of the e-commerce giant’s earnings report, due Thursday. Amazon also began layoffs in its cloud computing and human resources divisions Wednesday. The cuts were previously announced.
Chipotle Mexican Grill — Shares of the Mexican fast food chain soared 12.91% to hit an all-time high after the company reported quarterly earnings and revenue that topped analysts’ expectations. The strong results were fueled by robust same-store sales growth. CEO Brian Niccol also said the chain has demonstrated its pricing power.
Boeing — Shares rose 3% in midday trading, but closed up only 0.42%, after the company posted its latest quarterly results and said it would increase production of 737 Max planes later this year despite a production issue. Boeing reported an adjusted loss of $1.27 per share and $17.92 billion in revenue, while analysts anticipated a loss per share of $1.07 on $17.57 billion in revenue, according to Refinitiv.
Activision Blizzard — Shares slid 11.45% after a UK regulator blocked Microsoft’s purchase of the video game publisher. Activision Blizzard has said it will work “aggressively” with Microsoft to reverse the block. The company also posted better-than-expected adjusted earnings and revenue for the first quarter. 107230585

First Republic — Shares of the regional bank fell 29.75% on Wednesday, extending their steep losses for the week. First Republic’s advisors are pitching larger banks on a potential rescue deal, sources told CNBC, after the regional lender saw massive deposit flight during the first quarter.
PacWest — The regional bank’s stock popped 5.56% after the regional bank reported deposit inflows have stabilized, although they were still down in the first quarter. PacWest saw a $1.8 billion increase in deposits from March 20 to April 24. However, deposits for the first quarter totaled about $28.2 billion, down from $33.9 billion from the fourth quarter of 2022.
General Dynamics — Shares sank 3.55% despite a beat on earnings and revenue for the first quarter. However, its aerospace segment saw a decline in revenue thanks to fewer aircraft deliveries. CEO Phebe Novakovic also said the company will incur some period costs as it builds a “considerable” number of Gulfstream G700s to be delivered in the third and fourth quarters.
Enphase Energy — Shares tanked 25.73% after its second-quarter revenue forecast came in at $700 million to $750 million, missing estimates of $765.2 million from analysts surveyed by StreetAccount. Enphase CEO Badri Kothandaraman told CNBC’s Pippa Stevens growth in the U.S. is at a standstill. Rivals SolarEdge Technologies and First Solar also sank 8.6% and 3.4%, respectively.
Old Dominion Freight Line — The freight shipping company saw shares slide 9.97% after posting earnings and revenue for the first quarter that missed analysts’ estimates, according to FactSet. The company also reported volume declines, citing continued domestic softness and increased overhead costs.
Teck Resources — The stock rallied 4.05% after the Canadian-based mining company announced it will not proceed with its proposed split into two companies. Instead, Teck Resources will look to come up with a “simpler and more direct” separation plan.
— CNBC’s Yun Li, Hakyung Kim, Brian Evans, Pia Singh, Jesse Pound, Alex Harring and Tanaya Macheel contributed reporting. More

The central conceit of most zombie flicks, like “28 Days Later”, a film set in an apocalyptic London, is that a terrible disease has spread. It has turned legions of healthy humans into dangerous monsters. These walking dead now stalk the land: from afar it can be hard to discern if they are living or not. A little more than 28 days elapsed between the failure of Silicon Valley Bank (svb) and the publication of First Republic Bank’s first-quarter earnings on April 24th—45 to be exact—but the earnings made clear American banking has at least one walking-dead institution.At the end of 2022 First Republic held $213bn in assets, of which about $167bn were in loans and $32bn in bonds. It was funded by $176bn in deposits, $7bn in short-term funding and $9bn in long-term funding. The bank also had $18bn in high-quality capital. By the end of the first quarter the firm had lost $102bn of its original deposits. This has been replaced by a vast amount of short-term borrowing, which climbed to $80bn by the end of the first quarter, and by $30bn of pity deposits from six big banks, which placed money with the institution to throw it a lifeline. There are several problems with this picture. The first is that First Republic lent a lot of money when interest rates were low, including via cheap mortgages. Mark Zuckerberg is supposed to have taken out a 30-year mortgage for his $6m Palo Alto home at 1.05%. The value of such loans will have plunged as interest rates have risen. The second is that the deal with many well-heeled customers was that they would agree to move their deposits to the bank as well. But these customers, who held large balances uninsured by regulators, have now fled. Without cheap deposit funding, First Republic has turned to short-term funding—much of it lent by the Federal Reserve and the Federal Home Loan Banks, another government-backed lender, at market rates. This has probably demolished its ability to earn a profit. In the last quarter of 2022 First Republic earned a net interest margin—the difference between what it collects on loans and what it pays for funding—of 2.5%. That fell to 1.8% in the first quarter. Yet the reality could be even worse. After all, the first quarter included two months before svb imploded, implying First Republic earned next to nothing in net interest in March. In other words, the bank is paying as much for funding as it is receiving on its loans.There is no obvious escape for First Republic, unless depositors agree to return. It cannot earn its way out because net interest margins have collapsed. Selling off assets would not help either. Imagine the value of its loan book fell by, say, 10-15% in 2022, a price drop which would be less than the fall in the value of most mid-to-long-term government bonds. This would mean that if First Republic sold off such assets, all of its equity would be wiped out. Recapitalisation would be a solution, but investors do not seem keen. The bank’s share price plunged by 50% on April 25th. Its market capitalisation is now $1.2bn, down from $23bn in January. That leaves an svb-style wind-down: First Republic is reported to be in talks with regulators. How many other zombies are out there? A paper published in March by Erica Jiang of the University of Southern California and co-authors simulated what might happen if half of uninsured depositors—the type that felled svb and may soon fell First Republic—pulled their money out of the banking system. The bad news is that some 190 (unidentified) institutions were left with negative equity capital. The better news is that they are likely to have been smaller institutions, as they had combined assets of $300bn. If this figure included First Republic it suggests a bigger and more terrifying zombie is probably not lurking around the corner. Still, another jump scare hardly seems out of the question. ■ More