Markets
During the weekend, US authorities took steps to restore confidence in the US financial system after the collapse of Silicon Valley Bank (SVB). They included full protection for all depositors of SVB (and Signature Bank). At the same time, the Federal Reserve, with the backing of the Treasury, put in place a new ‘Bank Term Funding Program’ to provide 1-year funding for banks at less tight collateral conditions (full face value). Similar collateral requirements now also apply for the discount window. Despite the action from the US authorities, markets today again are trading extremely volatile as investors continue to ponder the consequences post SVB in terms of financial stability, the impact on the economy and the impact on Fed/CB policy going forward. At a time of market panic, it’s always difficult to assess what part of a move is due to a ‘simple’ defensive run for safety or to what extent investors are really changing expectations on central bank policy going forward. Whatever the explanation, US yields today additionally lose between 50 bps (2-y) and 15 bps (10-y)!!! Compared to Wednesday evening US 2-year yield has lost about 100 bps. The US 10-y yield ceded about 55 bps. Markets currently hardly discount one additional 25 bps Fed hike anymore. In Europe, German yields are tumbling between 53 bps (2-y) and 23 bps (30-y). Cumulative declines currently amount to 75+ bps for the 2-y yield (since Wednesday) and 55 bps for the German 10-y yield (compared to March 2 peak). Despite very explicit ECB guidance of late, market now also see an almost even chance on 50 bps or 25 bps ECB rate hike later this week. The expected peak in the ECB deposit rate has been reduced to about 3.15% down from 4.0%+ levels recorded mid last week. Markets obviously are solely focused on financial stability risks when assessing CB’s reaction function. Interesting to see whether this might change tomorrow when the US inflation data will be published. This morning, US equity futures initially reacted positively to the measures announced during the weekend. Sentiment deteriorated as the European trading session proceeded. The Euro Stoxx 50 at some point lost 3.5%+ (currently -3.0%). US equities also opened in red, but currently try to return in green with financials still feeling most of the strain. (Brent) oil dropped further to test the $80 p/b level. The combination of a sharp decline in core yields and an aggressive risk-off sentiment propels gold to the strongest level since early February ($1908 p/oz).
On FX markets, the dollar still doesn’t profit from the overall risk-off environment as the focus remains on US financial stability. Major USD cross rates showed substantial intraday swings. DXY hovers near the 103.75 area. EUR/USD after a strong open and a temporary intra-day dip, currently trades near the 1.07 big figure. The yen outperforms, against the dollar (USD/JPY 133 from a close on Friday near 135), but also against the euro (EUR/JPY 142.5 from 143.7). The Swiss franc also again enjoys as strong safe have bid, but EUR/CHF (0.974) at the lowest level since mid-October last year. Smaller less liquid currencies are fighting an uphill battle. EUR/SEK (10.43) intraday touched an new post-corona top. EUR/NOK also reached the highest level since May 2020. Among the CE currencies, the forint suffers most, with EUR/HUF returning to the 390 area. The Czech koruna eases to the 23.73 area. The zloty outperforms the region holding little changed near 4.685. Sterling also held relatively strong with EUR/GBP even easing slightly to 0.882.News Headlines
CNB vice governor Eva Zamrazilova said Czech interest rates will have to stay above neutral for longer than initially expected so that inflation doesn’t flare up again. She added that she doesn’t agree with the idea that when inflation returns to target, the CNB can go back to the decade-old policy of low interest rates. Czech money markets for a long time agreed but started pricing in faster rate cuts over the previous days amid heightened volatility in the wake of the SVB collapse. A first cut is anticipated in early Q3. The Czech crown, together with regional peers, is under pressure today. EUR/CZK advances from a Friday close at 23.64 to 23.74 currently.
