Market movers today
The week kicks off with an empty data calendar, so all eyes remain on banking sector developments.
This week’s main event of interest will be the FOMC meeting on Wednesday. As we see that the US authorities have managed to stabilise the situation in the banking sector, we see no reason for the Fed to stop hiking as core price pressures remain sticky.
Also the Bank of England, Norges Bank and the Central Bank of Turkey will announce their monetary policy decisions this week.
The key data point to watch will be the flash PMIs that are due in Europe and in the US on Friday. As the data has been collected mid-month, the figures could already capture some of the negative impact on confidence from recent market turbulence.
The 60 second overview
Banking sector news: Following a dramatic week, it was announced last night that Credit Suisse would be acquired by UBS for a total consideration of CHF3bn. While Credit Suisse remained solvent, the bank had seen significant client outflows which led to liquidity lines being extended from the Swiss National Bank on Wednesday. Nonetheless, that proved insufficient to instil confidence and eventually the take-over by the domestic rival bank was agreed and approved by the regulator during the weekend. The take-over results in UBS becoming a much larger bank and it is granted a transitional period for building up the appropriate capital buffers. In addition, SNB has pledged additional liquidity assistance while the federal government is also extending a CHF9bn guarantee to cover UBS’ losses from certain assets above a specified threshold. As part of the transaction, Credit Suisse’s outstanding AT1s are fully written down which could send broader jitters through this market segment. That being said, the fact that a private-sector solution was reached during the weekend should be positive overall. The announcement was welcomed in statements from the Fed, the ECB and the BoE. Additionally, the Fed has with five other major central banks launched daily swap lines to “ease strains in global funding markets” and hence improve access to dollar liquidity.
Markets: On Friday, equities closed lower (but gained over the week), US Treasury yields declined, the USD broadly depreciated, crude oil prices continue to tumble and gold rallied. US University of Michigan survey of consumer sentiment came out weaker than expected at 63.4 in March, down from 67 in February. Furthermore, short-term inflation expectations fell to 3.8% in March, down from 4.1% in February likely reflecting lower oil prices, and hence dampening, together with the turmoil in the banking sector, rate hike expectations from the Fed (more below).
This morning, Asian equity markets are in negative territory and both US and European stock futures are mixed. The two-year US Treasury yields decline Currencies are fluctuating with no clear direction. Overall, markets are generally cautious and risk aversion seems to be the driving force.
Fed preview: Last week, the ECB emphasized that there is no trade-off between inflation and financial stability risks, and we expect the Fed to deliver a similar message on Wednesday.
Fed cannot afford to stop tightening monetary policy and by no means start easing given that underlying price pressures remains sticky, or even accelerate, as we highlighted in Global Inflation Watch, Central banks balance inflation and financial stability risks, 15 March. For now, it seems the emergency measures have managed to stabilize the acute contagion risks, but as ECB demonstrated, they open up the door for further rate hikes even amid the ongoing uncertainty. The extent further tightening will be needed depends on how the banking crisis affects the macroeconomic outlook.
So far, short-term real rates and broader financial conditions have remained relatively stable. Our in-house ‘growth tax’ measure is at modestly restrictive territory, as the tightening in credit and equity components has compensated for the lower yields and mortgage rates. This suits Fed well as long as macro data remains strong, and for the time being, we like our call of a 25bp rate hike and a terminal rate at 5.00-5.25% in May. Hence, we see modest upside risks to short-term rates from current levels. Read more in Research US – Fed preview: Rate hikes continue despite the volatility, 17 March.
FI: Friday started off relatively mild as markets was in a wait and see mode for new info on the Credit Suisse situation and following the ECB meeting on Thursday. However around lunch time on worries of Credit Suisse implications, yields started to drop in a significant scale. Yields dropped across the curve, albeit slightly more in the 5y point than the rest of the curve. German yields ended some 20bp lower in the 2-10y point. Intra-euro area spreads widened slightly. German ASW spreads widened 5bp for 10y Bunds and 10bp for the 2y Schatz. The weekend’s news of UBS acquiring CS should support risk sentiment this morning, however with elevated uncertainty ahead of the central bank meetings this week, markets will be jittery to news. 10y US treasuries staged a 5bp selloff in early Asian session, but is now back to around Friday’s close at 3.42%. We have a number of central bank meetings this week starting with Fed on Wednesday and Norges, BoE and SNB on Thursday. We also have the ECB watchers conference on Wednesday which will also be to watch out for, and similar Lagarde’s hearing in the European parliament today at 15:00 CET.
FX: Global FX markets ended last week on a weak footing with Scandies lower and JPY higher. For good reason, given the developments over the weekend with the deal for UBS to take over Credit Suisse. Looking ahead, the big market mover this week is the FOMC meeting on Wednesday. We expect a 25bp hike that should weigh on EUR/USD.
