Financial Markets’ Weekly Recap 20 – 24 March 2023

Financial markets witnessed a very volatile week as investors and traders tended to believe that officials’ efforts to calm banking turbulence would allay concerns that the 2008 financial crisis would recur. Recent central banker statements that sounded less hawkish are bolstering the cautious optimism. In particular, today’s light calendar and the absence of significant macroeconomic events on Monday with the start of a new week allow traders to extend previous weekly moves ahead of the crucial US inflation cues, namely the Core Personal Consumption Expenditure (PCE) Price Index, due for release on Friday.

US Treasury bond yields struggle to maintain the three-week downturn while reflecting the mood, as benchmark bond coupons stay aimless near the most recent multi-day lows set in the previous week. To show a little bullish risk appetite, the S&P 500 Futures, which track Wall Street’s advances, print modest increases around 4,010 at the latest.

Fed and Dollar’s Performance

Following a week of concentrating on central banks, economic data will once again take centre stage while the ongoing banking crisis surrounds it. The DXY ended the week with a lower closing price but a stronger appearance, rebounding even as US rates fell, assisted by a decline in market confidence.

A new market season started on March 8, with the failure of the Silicon Valley Bank. In the most recent incident, additional central banks made the decision to hike rates, demonstrating their will to reduce inflation despite financial concerns. Developments in the banking sector will continue to be critical for sentiment and monetary policy expectations. It has loosened bank credit requirements, fulfilling a portion of the central bank’s mandate. Next week, central bankers will probably stay close to the recent guidance next week.

On Wednesday, the Federal Reserve (Fed) raised rates by 25 bps as expected, signaling a dovish pace of future hikes. Initially, markets reacted by selling the US Dollar, and Wall Street cheered timidly. That day, markets heard from Fed officials for the first time since the banking system crisis.

The DXY tested values below 102.00 before settling over 103.00. Despite lower yields, the dollar strengthened thanks to resurgent fears. Economic data showed activity, at least before the SVC collapse, was not near a recession. The US job numbers continue to show a competitive market. Next week’s data includes the Core PCE on Friday, a closely watched inflation indicator.

The week ended with EUR/USD trending lower and rising, but the momentum was gradually losing steam. Although trading above the 20-week Simple Moving Average, the pair lost 200 pip from the 1.0930 region to settle at 1.0750. The preliminary PMIs on Friday showed overall positive figures. The preliminary March inflation numbers next week will be critical. European Central Bank officials continued to speak about the need to do more. Expectations about more rate hikes supported the Euro, which was among the top performers.

GBP/USD failed to remain above 1.2300, and it closed the week almost exactly flat at 1.2220. As predicted, the Bank of England (BoE) increased the key rate to 4.25%. (7-2 vote). The bank could rise further if inflation does not surprise to the downside in March. Next Friday, Q4 GDP data is due.

The Japanese Yen benefited from the decline in US yields, outperforming most of its G10 rivals. USD/JPY dropped for the fourth consecutive week, ending above 130.00, an area that seems poised to be tested again over the following sessions.

USD/CAD rose above 1.3800 on a monthly basis before declining. The Canadian government will present the budget on Tuesday. On Friday, the January GDP will be released.

The move from monthly lows in AUD/USD came to an end at the daily 200-SMA near 0.6760, and now the Dollar will choose how low it falls. Australia will report Retail Sales on Tuesday and critical inflation numbers on Wednesday. Those figures could cement the decision of the Reserve Bank of Australia that will have its meeting on April 4.

The Mexican peso, which had fallen during the previous two weeks, was the most strongly regaining currency among the most traded ones. The USD/MXN dropped below 18.50 and lost more than 2%. The Bank of Mexico will announce its decision next week. Further rate increases are anticipated, but at a slower rate than in February, when it increased rates by 50 basis points. Core inflation is finally coming down in Mexico, with the half-month print at 8.15%, down from 8.21%.

Oil, Commodities

WTI crude oil prices settled lower last week, paring gains for the week 1. May WTI oil lost 70 cents, or 1%, to settle at $68.98 a barrel on Friday. Brent crude oil fell to $76.15 a barrel on Wednesday. Brent crude futures fell to near $73 per barrel on Friday as US Energy Secretary Jennifer Granholm told lawmakers that it will be “difficult” to refill strategic oil reserves this year, prompting speculations that the US government would only start buying at even lower prices.

Geopolitically, the new trading week has Russia’s Vladimir Putin said Saturday that Russia plans to station tactical nuclear weapons in neighboring Belarus. A special storage facility for tactical nuclear weapons in Belarus is to be built and installed by the beginning of July, Putin told state broadcaster Russia 1.

Gold

Gold suffered weekly losses of about 0.6%, settling at the end of last Friday’s trading at 1976 an ounce, compared to the previous weekly closing, which recorded $1988 an ounce. The precious metal rose to its highest level in the past week at 2009 dollars, compared to the lowest levels recorded at 1943 dollars.

Stocks Watch Rapid Developments Attentively

Wall Street posted small gains for the week, and the VIX experienced a significant decline. Regional bank stock prices are still volatile and have the potential to seriously undermine investor confidence. Market investors will be on the lookout for potential financial news over the weekend. Moreover, Janet Yellen, the US Treasury Secretary, might have some surprises in store.

Events have gone into overdrive since the failure of Silicon Valley Bank and Signature Bank. The weekend of 18/19 March saw authorities in Switzerland seek to restore confidence by orchestrating the takeover of Credit Suisse by UBS. The ECB, the US Federal Reserve, along with the US Treasury, and other central banks have welcomed the rapid response to ensure financial stability.

A turbulent start to the week

One of the provisions in the UBS takeover agreement, namely the writing-down to zero of Credit Suisse’s “Additional Tier 1,” a hybrid debt instrument, for a total of 16 billion Swiss francs (USD 17.47 billion), set off investor jitters. This choice was seen as overturning the traditional order and favouring stockholders above debtors.

The European Banking Authority’s communiqué on March 20 reassured markets by restating the advice that “common equity instruments are the first to absorb losses, and only after their full use would Additional Tier One be required to be written down.” This aspect of the takeover has been the subject of much discussion.

Eurozone officials were able to ease investor fears by stating that “AT1 bonds are and will remain an important component of the capital structure of European banks,” along with a similar assurance from the UK government.

Notwithstanding ongoing uncertainty regarding the future of San Francisco-based First Republic Bank, financial stock indices in the US and Europe swiftly recovered. According to reports, some of the largest US banks involved in the infusion suggested they may obtain a capital stake with the help of the US government after depositing USD 30 billion with First Republic bank.


Possible market drivers for the new week:

Shares of local banks
US Treasury Secretary Yellen
Figures for eurozone inflation
US Core PCE