Weekly Market Updates / 2 weeks ago
The Axiom IFS Update 13th March 2023
SVB deposit holders woke up this morning to the good news that their funds are safe and will (eventually) be made available to them. HSBC acquired the UK bank for £1.
After a hectic few days for many businesses worried about the viability of their banks on both sides of the Atlantic the immediate future of Silicon Valley Bank and Signature Bank seems secure. The US government has guaranteed all the deposits held by clients of SVB in the USA and the UK subsidiary has been bought by HSBC meaning that customer funds are also safe here too. The risks of contagion to other banks appear low, however the memories will linger and may trigger a change in behaviour so that businesses diversify their risk by holding funds in more than one account. To that end please let us know if we can help you or anyone in your network. As attention turns towards interest rate decisions due next week will last week’s crisis concentrate the minds of policy makers? The recent demonstration of the real world economy feeling the pressure of tightening interest rates may see smaller increases or a shallower terminal rate than was envisaged last Thursday morning.
Sterling opened this morning’s trading session in mixed fashion after slightly ceding ground to an outperforming Euro and Dollar even after a better than expected set of January GDP figures from the UK last Friday. With the economy more resilient than anticipated, the Chancellor is in a more favourable position for Wednesday’s annual fiscal update. However, he is also constrained by lingering risks of inflation and pessimism about the long-term prospects of the economy. Nevertheless, while Wednesday’s budget is the highlight of the week for Sterling, it is preceded by the release of employment and wage data for January. This is likely to be influential for next Thursday’s Bank of England interest rate decision and the outlook thereafter.
The U.S. dollar slipped lower this morning after Friday’s U.S. labour data for February showed slower wage growth. Moreover, traders and investors have been reassessing the likelihood of another rate hike by the Federal Reserve given the ongoing U.S. banking crisis as well as SVB’s collapse. Looking forward, market participants will be anxiously waiting for tomorrow’s inflation data. A hotter-than-expected inflation reading could reignite fears among investors already on eggshells following the failure of SVB. Economists are expecting monthly inflation to rise by 0.4% February after a 0.5% increase the prior month for an annual gain of 6%. Ultimately, Fed Chair Jerome Powell said the U.S. central bank is likely to raise rates higher than previously expected if upcoming data shows that the economy remains hot after almost a year of tightening but added that no decision has been made yet about the upcoming March meeting.
The ECB looks set to hike interest rates by another 50-basis points at its meeting on Thursday after already raising rates by 3 percentage points since July in a bid to tame inflation. Data showing that underlying inflation in the Eurozone ticked higher last month added to concerns that price pressures are proving persistent. Moreover, markets have started to price in another 50-basis point hike at the ECB’s May 4^th meeting. In fact, the minutes of the ECB’s February meeting have done little to challenge those expectations. Ultimately, ECB President Christine Lagarde will likely be put on the spot on how high rates will go at Thursday’s post-policy meeting press conference.
Despite the rally in high beta currencies over the past week, the loonie has been the laggard. Owing to the Canadian economy’s interconnectedness with the US, the Canadian dollar’s sensitivity to US equities and potential financial stability risks has hamstrung its ability to rally on the back of narrowing US-Canadian rate differentials. Additionally, with financial stability considerations back under the limelight, the risks from Canada’s highly leveraged housing market and little in the way of Canadian data today the focus will be on how US markets perform.
Gold is surging higher in the last four days and is up around 1% on the day. Falling US Treasury yields have fuelled the price as the market seems to be scaling out any 50 bps rate hike possibility for the March FOMC Meeting. XAU/USD benefited amid the softer US Dollar earlier in the Asian session due to the Fed and the US Treasury intervening in the banking system to rescue Silicon Valley Bank (SVB) and Signature Bank.
Bond markets surged, US equity futures erased gains and European stocks tumbled as the collapse of Silicon Valley Bank continued to reverberate through trading desks and weigh on banking shares. Contracts on the S&P 500 initially rallied early on Monday as investors dialled back rate-hike bets, but gave up those gains to turn lower as bank stocks resumed declines in US premarket trading. First Republic Bank shares slumped more than 60% as the regional lender became the latest casualty of liquidity concerns. Among major lenders, Wells Fargo was down 2%, Goldman Sachs Inc. dropped 1.8% and Citigroup Inc. slipped 1.7%.
Crypto markets cooled after Bitcoin wrestled its highest jump in nearly a month on Monday, following moves by US authorities to stem the spread of concern about the health of the nation’s financial system. The largest crypto asset by market value sat on a 24-hour increase of around 2.6% to $22,044 on Monday morning in London, after gaining as much as 6% in the early hours of Mar. 13 — its biggest increase since Feb. 15.
Saudi Aramco reported record profits of $161bn in 2022 and increased its quarterly payout to shareholders to almost $20bn as the largely state-owned oil company cashed in on a tumultuous year in energy markets. The Saudi Arabian producer said on Sunday that it sold more oil than in 2021, improved refining margins and benefited from strong crude prices, which helped net income to rise 47 per cent to its highest since the company began publishing results after listing in 2019.
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