Europe Set to Open Cautiously Higher

Forex

Summary:

After opening the week lower, European stocks recovered early losses to finish the day higher yesterday, as markets tried to absorb the events of the weekend, and the $3bn absorption of Credit Suisse by its bigger Swiss rival UBS.

While the deal raises a number of questions with respect to shareholder and bond holder priorities, regulators across the EU assured nervous markets that the Swiss bailout was unique to the two Swiss banks, while investors took the view that recent events would prompt a slowdown in the pace of central bank tightening this week.

Even the problems being felt in the US banking system were being shrugged off with further weakness in First Republic Bank being treated as a localised difficulty, rather than anything more systemic.

US markets also finished the day strongly, building on the gains that we saw last week with the Dow and S&P500 closing close to the highs of the last few days. This positive finish has seen Asia markets edge higher and also looks set to translate into a positive European open this morning.

With the Federal Reserve rate meeting due to start later today, markets have become increasingly divided as to what the FOMC may well do when it comes to interest rates tomorrow, with opinions split between another 25bps hike, a pause, and a 25bps rate cut.

Assuming recent gains hold, and we get no further surprises then the odds still favour a 25bps rate rise, otherwise, the Fed runs the risk that it sends the message it is more concerned about financial stability than it is about its fight against inflation. A rate cut would send an even worse message that the Fed sees something the market doesn’t and could spook already jittery markets even further.

Against that backdrop today’s European open looks set to be a positive one, however, sentiment is likely to remain fragile over the next few days until we see the outcome of tomorrow’s Fed meeting, and their take on recent events, while on Thursday we get the latest central bank decisions from the Swiss National Bank and the Bank of England.

In light of recent events, the actions of the SNB will be particularly notable given they are expected to hike rates by 50bps. If any central bank has a reason to think again about raising rates it's surprising no one has mentioned the SNB, although Swiss rates are still very low relative to their peers at 1%.

On the data front the latest UK Public sector borrowing numbers for February are expected to see normal service resumed for the UK government are the net receipts of £5.4bn that topped up the Treasury coffers in January.

Today’s numbers are expected to see monthly borrowing rise to £11.8bn, even as tax receipts showed the UK economy is performing much better than the more pessimistic expectations that we saw at the end of last year.

We also have the latest German ZEW investor survey for March which is expected to show a significant deterioration from the improvement seen in the February numbers. March expectations are expected to slow to 15.7, after hitting an 11-month high of 28.1 the previous month. The current situation isn’t expected to change that much, with an expectation of an improvement from -45.1 to -44.3.

In Canada the latest inflation numbers are expected to show a modest slowing in headline CPI to 5.4% from 5.9%, while the median core is forecast to slip back to 4.8%, in a sign that it continues to remain sticky, having been stuck around the 5% level for the previous 3 months. .

EUR/USD – retesting the last week's highs at 1.0760 as well as the 50-day SMA. A move through here retargets the recent range highs at 1.1030. Still have support at recent lows at 1.0520.

GBP/USD – had a strong day yesterday and looks set for a retest of the range highs at 1.2300, and even the 1.2450 area. Still has solid support at 1.1800 with a break targeting the 1.1640 area.

EUR/GBP – a break of trend line support from the lows last August, currently just above the 0.8700 area, could well see further losses towards 0.8620. Resistance at the 0.8830 area.

USD/JPY – slipped back to cloud support between 130.30/40 yesterday, with the main resistance still up near the 200-day SMA at 135.90. A break of 130.00 targets the 128.00 area.

Source: CMC

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Samantha Luan

Forex

Central Bank

Australian Dollar is declining broadly as RBA minutes hinted at the possibility of a pause during their next meeting. Meanwhile, Yen has managed to hold on to the some gains it made earlier this week and appears poised for further rallying, particularly against commodity-based currencies.

Both Euro and Sterling have maintained their strength after being bought against Swiss Franc. However, their momentum seems to have slowed down a bit. Dollar is on the path to recovery from previous losses but all would depend on tomorrow's FOMC rate decision. Canadian Dollar remains in a mixed state as market participants eagerly await the release of the Canada CPI data.

Elsewhere in the markets, the banking crisis seems to have reached a point of stabilization at last, with hope that this trend will continue. Asian stock markets are making a comeback, taking cues from the rebound in US markets. Benchmark treasury yields in both the US and Europe have also bounced back, signaling a halt in the flow of funds towards safe-haven assets.

Gold, after spiking higher yesterday, is currently in a consolidation phase. However, it remains poised to potentially break through the 2000 mark again in the near future.

RBA Minutes: To reconsider a pause at next meeting

The minutes of RBA's meeting on March 7 indicate that the central bank is considering a more cautious approach in tightening monetary policy, as uncertainty surrounding the economic outlook persists. The RBA members observed that "further tightening of monetary policy would likely be required to ensure that inflation returns to target." However, they also noted the restrictive nature of current monetary policy and the economic uncertainty, stating that "it would be appropriate at some point to hold the cash rate steady."

During the meeting, RBA members agreed to "reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy." The decision on when to pause will be determined by incoming data and the board's assessment of the economic situation.

The RBA acknowledges that "the outlook for consumption remained a key source of uncertainty." The central bank will closely monitor upcoming data releases on employment, inflation, retail trade, and business surveys, as well as developments in the global economy, to inform their decision-making.

GBP/AUD resuming rally after dovish RBA minutes

Australian Dollar trades mildly lower after RBA minutes indicated the possibility of a pause in tightening at next meeting. On the other hand, Sterling (and Euro too) is supported by funds flow from Swiss Franc. But there are some uncertainties for the Pound ahead with UK CPI and BoE rate decisions scheduled later in the week.

Technically, GBP/AUD is resuming the near term rise by breaking last week's high at 1.8316. At the same time, rise from 1.7218 is likely resuming the whole up trend from 1.5925. Near term outlook will stay bullish as long as 1.8074 support holds, even in case of retreat. Next target is 61.8% projection of 1.5925 to 1.8272 from 1.7218 at 1.8668. Nevertheless, break of 1.8074 support will delay the bullish case and bring some consolidations before another rally attempt. Aussie Falters After RBA Minutes; Canada CPI Awaited_1

Aussie Falters After RBA Minutes; Canada CPI Awaited_1

CAD/JPY ready for down trend resumption as Canada CPI looms

Today, Canada's consumer inflation data takes center stage as markets anticipate a slowdown in headline inflation from 5.9% yoy to 5.4% yoy in February. If this decrease materializes, it would mark the lowest inflation reading in over a year. BoC's preferred core inflation metrics, the trimmed and median CPI, are also projected to decelerate from 5.1% yoy to 4.8% yoy and from 5.0% yoy to 4.8% yoy, respectively.

BoC became the first major central bank to pause its tightening cycle last Wednesday, following eight consecutive rate hikes totaling 425 basis points. Market participants are still expecting one more rate increase this year, but these odds could dwindle if inflation continues to decline.

CAD/JPY is closely watching the 94.61 support level after a recent drop. A decisive break below this threshold would rekindle the broader downtrend from the 110.87 high and aim for a 61.8% projection of 110.87 to 94.61 from 100.85 at 90.80. However, if the cross breaks above 97.53 resistance, it could delay the bearish scenario and extend the corrective pattern from 94.61 with another upswing. Aussie Falters After RBA Minutes; Canada CPI Awaited_3

Aussie Falters After RBA Minutes; Canada CPI Awaited_3

Looking ahead

Germany ZEW economic sentiment will be the man focus in European session. UK will release public sector net borrowing. Swiss will publish trade balance. Later in the day, Canada CPI will take center stage while US will release existing home sales.

Source: ActionForex.Com

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Owen Li

Central Bank

The Minutes of the Reserve Bank Board meeting on March 7 highlight that unlike recent meetings when several policy options were considered the March meeting only considered the case for 25 basis point increase – the resulting decision.

However, the Minutes note that “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy.”

This decision is despite the Board meeting (March 7) occurring before the Regulators took control of Silicon Valley Bank on March 10.

There is considerable discussion of market pricing in the Minutes. “Market pricing implied a 25 basis point increase in the cash rate at the March meeting and suggested that the cash rate would peak at around 4 ¼ % in the second half of 2023,” – with the market response to the global disruptions to the financial sector this pricing has fallen to below 3.6%; that is no further rate hikes with the possibility of rate cuts.

Similarly on international markets the Minutes refer to, “Market participants’ expectations of the path of policy rates in advanced economies had shifted up since the previous meeting.” Now, market pricing for the FOMC is predicting a series of rate cuts over the course of 2023.

Clearly the Board takes market pricing into account. At the time of the Board meeting market pricing supported the view that, in the case of the RBA, nearly 75 more basis points of tightening were likely to follow the March meeting. Now that pricing has fallen away completely.

The discussion on the outlook for policy as dictated by the data highlights the Board’s current uncertainty.

It makes the strong case for the increase at the March meeting while emphasizing uncertainty going forward.

In assessing the recent softening in the data – national output growth; wages growth; monthly inflation – the Board noted “it would be prudent not to place too much weight on one period’s data” …. But “it was appropriate to take some signal from the consistent pattern across recent data releases.”

There are other examples in the Minutes where the Board highlights its uncertainty through its mixed interpretation of the data: “monetary policy was in restrictive territory and that the economic outlook was uncertain”; “members noted that it was not yet possible to determine how these various considerations would balance out.”

But the key point remains clear, “core inflation remains too high ….. the staff’s most recent forecasts were for inflation to return to the 2-3% target only by mid–2025.”

We expect that the case for a pause in April is supported in these Minutes – particularly given the unusual commitment to consider a pause and subsequent developments in market pricing and global financial markets.

However, the overriding challenge of returning inflation to the target will remain the dominant theme at the May meeting when, we expect, the Board will be confronted with a refreshed set of forecasts (benefitting from the March quarter Inflation Report), which will still highlight that inflation will not be at target until mid-2025 – requiring a final 25 basis point increase.

Conclusion

Westpac has been forecasting a pause at the April meeting – the strong emphasis on uncertainty in the March Minutes; the unusual commitment to consider a pause in April; and developments in market pricing and global financial markets all support that view.

But the Minutes continue to make a strong case for the need to reign in the “too high” inflation. This challenge is likely to be just as apparent at the May meeting, when much more information will be available on the inflation challenge, requiring a “final” 25 basis point tightening.

Source: Westpac Banking

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Cohen

Stock markets are falling, oil dropped to prices not seen since 2021 and gold is trending higher. The general symptoms that would be expected as a recession developed. The collapse of three banks in the US, and Credit Suisse not only once again dropping to record lows, but having the largest drop in its stock price in history. It's not surprising at all that the market is having jitters. The question is whether this is a passing issue, or can we expect the situation to get worse.

The contagion issue

There has been a lot of talk in the media of "contagion". That implies that there is a problem in, say, SVB which passes on to other banks, causing them to have issues. And so on for a cascading effect. Regulators have come out to repeatedly assure the market that there isn't any "contagion" risk.

The problem with this is that it could lead people to think that a company which doesn't have investments in SVB (or any of the other banks in trouble), then it's safe. There is no contact through which there could be contagion. While that certainly is a concern, it's also possible for other bank or businesses to be in trouble without a direct link to one of the banks that recently went under.

The tip of the iceberg or just a mirage?

Take Credit Suisse, for example; it is experiencing difficulties and isn't related to SVB. However, it is operating in a similar environment. A prolonged period of low interest rates led banks to build up a large amount of low-interest reserves that is now causing them unrealized losses when interest rates go up.

The problem isn't necessarily "contagion", but that other banks could be in a similar position, and SVB was just the first. Sort of a canary in the coal mine scenario. Ultimately, the problem that the three banks that just went under had – and increasingly Credit Suisse has – is difficulty accessing liquidity. Tight liquidity means they are forced to sell assets at a discount, pushing down the value of those assets. If enough institutions find themselves in that position, then the whole market goes down in a crash.

It's now down to monetary policy

If other institutions don't end up having a liquidity problem, or their central bank provides liquidity, then SVB might just be a hiccup in an otherwise steady market. The focus, therefore, turns to what the central banks will do. Until now, they've been pushing rates higher to get inflation down. But the current crisis could lead to putting an end to that, which could allow inflation to start rising.

Until recently, the fear of inflation was that it would cause central banks to raise rates and slow the economy. But if central banks don't raise rates, inflation can still be a problem, since the erosion of purchasing power can lead to demand destruction. So far, central banks have been relieved that there has been no wage-price spiral, because wages have increased less than inflation has. That's fine if inflation is transitory. But central banks give up on fighting inflation, and wages don't keep up with prices, then there could be an extended economic slump instead of a crash.

Source: Orbex

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Alex

Economic

Utah homebuilder Ivory Homes still has a pipeline of several hundred houses under construction, but CEO Clark Ivory isn't pulling permits for any more at this point, and in a year of retrenchment for the single-family home industry, he has laid off just under 10% of his workers.

But don't look for that to be reflected in overall U.S. construction employment or spending data, a canary that is very much still breathing inside what would usually be the toxifying air of rising U.S. interest rates.

While housing starts are falling, "there is still a fair amount of completion happening," Ivory said, adding that contractors can move on to other jobs once finished with his company's projects. "There are other areas of construction - public works, industrial, roads and infrastructure. There is so much money out there," he said, from pandemic spending programs as well as recent federal government initiatives like the Inflation Reduction Act.

The Canary is Alive and Chirping a Year into Fed's Rate Hiking Cycle_1

A year after the Federal Reserve began a historic drive to arrest inflation with rapid interest rate hikes, Fed officials meeting this week face a wildly confusing economy that by some measures continues operating beyond capacity - a recipe for rising prices - and by others seems to be approaching a serious fissure given how a banking crisis has rattled markets in the last two weeks.

Is the economy really standing firm against the Fed's aggressive rate moves? Rate increases have averaged more than half a percentage point at each of the eight Fed meetings since March of 2022, and pushed the benchmark overnight interest rate from the near-zero level to the current 4.50%-4.75% range.

Or are businesses and consumers just slow to respond, with the full impact perhaps developing now?

As the tightening orchestrated by Fed Chair Jerome Powell hits the one-year mark, the extent of the influence depends on where you look.

A Mixed Inflation Scorecard

The Fed's purpose throughout its aggressive tightening cycle has been to reduce inflation from the 40-year-high reached last summer down to the 2% annual rate the central bank regards as consistent with its generic goal of "price stability."

Inflation has slowed.

But recent progress has been less than hoped. As of March 8, in his last public comments before the Fed's March 21-22 meeting, Powell said recent data had "reversed the softening trends" the central bank had hoped were becoming established, and that meant higher interest rates might be needed to slow an economy that doesn't want to buckle.

Dogs That Didn't Bark (Yet)

Construction: The status of the construction industry shows the Fed's pandemic-era dilemma.

Monetary policy works on the economy through many different channels, but housing is an important one. As interest rates rise, buying slows, spending that would have taken place on home building supplies and new home furnishings plummets, and existing homeowners shy away from financing major improvements.

Since the 1970s, declines in housing starts have been followed by drops in construction employment, and been associated with the onset of recession.

It is not happening the same way this time.

The Canary is Alive and Chirping a Year into Fed's Rate Hiking Cycle_3

Employment: The job market overall in fact has shown only initial signs of slowing - and the Fed has put a lot of weight on tempered job and wage growth as a necessary condition for inflation to fall.

Between ongoing demand and the difficulty of hiring, many businesses seem to be holding on to existing workers and adding headcount when they can to try to stay fully staffed. The number of job openings for each available worker has barely budged from the record levels set during the COVID-19 pandemic, and monthly job growth remains in the hundreds of thousands.

The Canary is Alive and Chirping a Year into Fed's Rate Hiking Cycle_4

Income: For households, that means the pump is still primed. Even after adjusting for inflation, after-tax income - the amount of money left to spend or save - has been rising.

Signs of stress?

The Fed's rate increases have had an impact.

Manufacturing: A broad index of industrial output published by the Fed is among the top-line data that economists watch for signs the U.S. is entering recession. It is currently declining.

The Canary is Alive and Chirping a Year into Fed's Rate Hiking Cycle_6

Capital expenditures: Business investment is also weak, and detracted from overall economic output last year - also a common precursor to recession and a sort of proxy vote by firms about the outlook and a sign they are delaying spending.

The Canary is Alive and Chirping a Year into Fed's Rate Hiking Cycle_7

Credit: Tighter monetary policy is starting to show up in measures of credit as well, and recent stress among midsized banks may add to that if financial firms become more cautious in their lending.

As long as it remains orderly, a credit crunch could be positive for the Fed. If businesses and households are less free to borrow, they are likely less free to spend - and demand for goods and services will fall, as should the pressure to raise prices.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Fears of a global banking crisis are continuing to swirl, with investors keeping a close eye on a dashboard of indicators that show how stress is rippling through markets and the banking system.

Many of these are continuing to flash warnings, though they have not surpassed levels seen during the COVID-19-fueled market turbulence of 2020. Despite a state-backed takeover of Credit Suisse by UBS AG, a wipeout of some Credit Suisse bondholders has added to concerns over broader bank capital.

Uncertainty around U.S. banks remains high as well. Shares of embattled regional lender First Republic Bank were down 34% Monday afternoon following a downgrade by S&P Global and continuing worries over the bank's liquidity despite a $30-billion rescue last week.

Here are some of the indicators investors are watching, and what they are showing:

Market Stress Indicators Flash Warnings as Banking Worries Continue_1

An indicator of credit-risk in the euro zone banking system, the so-called FRA-OIS spread, hit its highest levels since mid-July last week but has pulled back from those highs.

But the spread, measuring the gap between the euro zone three-month forward rate agreement and the overnight index swap rate, is still relatively elevated at around -1 basis points in a sign of lingering concern about financial market stress.

Market Stress Indicators Flash Warnings as Banking Worries Continue_2

The cost of insuring exposure to European junk bonds rose to the highest since mid-November on Monday at over 516 basis points.

This has risen over 130 basis points since March 7 as riskier assets have borne the brunt of bank turmoil on both sides of the Atlantic.

Market Stress Indicators Flash Warnings as Banking Worries Continue_3

Junk spreads - the premium investors demand to hold the riskier debt over U.S. Treasuries – rose to 520 basis points last week, the highest since October last year, according to the ICE BofA U.S. High Yield Index.

Investment grade credit spreads, which indicate the premium investors demand to hold highly rated corporate bonds over safer U.S. Treasuries – rose to 164 basis points last week, the highest since October, according to the ICE BofA US Corporate Index

Market Stress Indicators Flash Warnings as Banking Worries Continue_4

Meanwhile, last week's wild swings in the Treasury market have whipsawed investors and contributed to unease. The ICE BofAML MOVE Index, a measure of expected volatility in U.S. Treasuries, surged to its highest level since the financial crisis last week as troubles in the banking sector forced investors to pull back on their views of how aggressively the Federal Reserve will raise rates in coming months.

With little certainty on what signal the central bank will send on the future trajectory of monetary policy at the conclusion of its meeting on Tuesday and Wednesday, many believe volatility in Treasuries is unlikely to die down anytime soon.

Source: The Economic Times

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Thomas

Stocks

Asian stocks were lifted from lows on Tuesday, with the rescue of Credit Suisse stemming selling in bank shares, though the mood was fragile and the stress in markets had traders wondering whether U.S. rate hikes might be finished.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5% in early trade. Australian shares bounced 1.3% from Monday's four-month trough and the Hang Seng opened 0.7% higher.

Japanese markets were closed for a holiday, though Chicago-traded Nikkei futures were in the green.

Overnight an early selloff in Europe was reversed and on Wall Street the S&P 500 rose 0.9%. U.S. futures rose 0.2% in early Asia trade.

A Swiss government-backed buyout of Credit Suisse by UBS has cauterized the immediate concern over European financial stability. But the wipeout of some Credit Suisse bondholders has sent a shockwave through bank debt, and persistent signs of stress at U.S. regional lenders has investors on high alert.

"Globally, I think we're a long way from being out of the woods on this," Sydney-based Jefferies' banking analyst Brian Johnson said, with the present stress set against a backdrop of higher capital costs and declining loan growth.

San Francisco lender First Republic seems to be a case in point. Its share price halved on Monday on worries that $30 billion in deposits posted by bigger banks less than a week earlier would not be enough to shore up its stability.

The writedown of Credit Suisse's "additional tier 1" debt to zero also set off frantic selling of similar debts at other banks because holders were surprised that the long-standing practice of paying creditors before shareholders was not fully followed.

That somewhat abated after regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent.

A London-listed exchange-traded fund <INAT1.L > that tracks such debts pared steeper losses to finish 5.7% lower on Monday, but nerves - and higher funding costs for banks - will likely linger.

"This remains a significant breakdown in how the credit stack works," Johnson said.

In foreign exchange markets the U.S. dollar steadied after slipping overnight. It last bought 131.90 yen and held at $1.0718 per euro. Bond markets whipsawed overnight as traders seek to figure out what the bank stress means for rates policy.

A holiday in Tokyo left Treasuries untraded in Asia.

Central bank meetings in Britain and the United States are scheduled this week, with the Fed first up on Wednesday.

U.S. interest rate futures have priced in just one more 25 basis point hike before a series of cuts beginning as soon as June. The CME FedWatch tool shows pricing implying about a 74% chance of a rate hike on Wednesday.

"The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes," said Standard Chartered's head of G10 FX research, Steve Englander.

"If the (Fed) pauses, the message may be that it sees further hikes as markets settle down. But the reality may be that a March pause effectively ends the hiking cycle if the economy slows."

In commodity markets, demand jitters have Brent crude futures pinned below $80 a barrel; they were last at $73.80. Gold hit a one-year high of $2,009 an ounce overnight, before easing to $1,979 on Tuesday.