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The Disaster That Never Comes

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The debt ceiling is practically agreed upon, gold prices contract, and the bulls dominate the markets – will the long-awaited correction never come? Not so fast. Despite PacWest Bancorp’s stock recent rebound, the future of regional banks remains in question.

The country’s economy is also starting to tempest on one foot…

According to Robert Kaplan, former president of the Dallas Fed, the downturn in the commercial real estate market and further rate hikes will increase costs and put additional pressure on the deposit base of financial institutions.

Small and mid-sized banks must overcome difficulties in raising capital to reduce their loan portfolios, making it much more difficult for small and medium-sized businesses to obtain new credits. Eventually, this could lead to a decline in economic activity and a rapid rise in unemployment.

Regarding the Republican negotiations with the Democrats, first, the Congressmen have to give the bill the green light. Second, once the deal is done, the U.S. Treasury will start “sucking” liquidity from the market. JPMorgan estimates that about $1.1 trillion worth of Treasury bills could be issued over the next 7 months.

The amount is huge, especially for such a short period.

Speaking of the markets, NVIDIA delivered its quarterly report, which beat Wall Street’s expectations. NVIDIA’s fiscal first-quarter revenue was down 13% year-over-year to $7.19 billion, while it was up 19% quarter-over-quarter.

Following NVIDIA’s strong numbers, the market began buying shares of other chipmakers and AI technology developers. According to Reuters’ estimates, the total capitalization of AI-related companies grew by almost $100 billion in a single day.

The big question is how long the AI mania will last and whether further rate hikes will affect stock market sentiment. There is a risk that the market outlook could change dramatically if the Fed raises rates above 6%, as suggested by Minneapolis Fed President Neel Kashkari.

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