Podcast: Banking nerves persist

Created: 27th March 2023

So, what do we know?

(A forex, index, and commodity market review)

Following the rescue of Credit Suisse by UBS last weekend, investors were hoping that any possible  contagion in the banking sector had been snubbed out.

However, despite the banking turmoil, the ECB raised rates as expected and last week the Federal Reserve and the Bank of England also served up 0.25% hikes in interest rates. Whilst the initial reception to the two hikes was relatively measured, pressure had been building in Deutsche Bank’s five-year credit default swaps which are effectively insurance that pays out if the bank defaults on its payments. Between last Wednesday and Friday the cost of this insurance had jumped from 1.5% to 2%.  By Friday Europe’s banking sector took a big hit as investors marked down all major banks with Deutsche Bank falling as much as 13% eventually closing on Friday down 8.5% following some supportive comments from Olaf Scholz who said “Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank,”.

Weekly change (amount change and percentage change on the week)

FTSE                +70       +0.95%  
DAX                 +189     +1.28%  
DOW               +375     +1.18% 
S&P                 +54        +1.39%
NASDQ            +193      +1.66%
NIKKEI             +51        +0.19%  
Hang Seng       +397      +2.03% 

Global stock markets recovered further from the collapse of three banks in the US that were exposed to significant losses on their bond polios following the rapid rise in interest rates in the US. This crisis appeared to spread to Europe and credit Suisse, a Swiss bank that has lurched from crisis over the past two decades. Whilst the Swiss National Bank took decisive action in organising a takeover of Credit Suisse by UBS, a number of analysts believe there are more suspect banks out there that would be uncovered – resulting in a slow car crash in the banking sector rather than a collapse in banking stocks.

Deutsche bank is a curious case because it does not look vulnerable as its has a healthy balance sheet and has been quite profitable. The problem for Deutsche bank is it’s past reputation and history which has been marked by problems especially of the past decade. So investors just decided that they needed insurance to protect them from any nasty out there that could undermine the bank. Hence the jump in the costs to insure against Deutsch Bank defaulting which then hit its share price. What may have been  a factor was the circulation of dire warnings about the commercial real estate sector in the US and massive portfolio of loans that the US banking sector held on its books and that could have to be written down.

The effects of Fridays rout in Bank stocks also hit the UK FTSE100 with its heavy weighting in the banking sector. With Nat West Group down 3.6% and Barclays down 4.3%.

Despite this banking crisis emanating from the US, US shares dipped on Friday in response to the European moves, but by the close the KBW banking index was up 2.9% whilst the broader S&P500 was 0.6% higher and the NASDAQ up 0.3%. For the week, both US indices were up 1.39% and 1.66% respectively; comfortably higher than when the banking crisis emerged. Doubt still remain as investors remain critical of Powell and Yellen for not doing enough to instil more confidence in the banking sector. The US treasury bond yields suggest that confidence is still very fragile.

The Federal reserve delivered its anticipated hike of 0.25% in interest rates. Expectations have varied widely over the past 3 weeks as investors reacted to the banking crisis with much concern. Some notable banks, such as Goldman Sachs were calling for no change from the Federal Reserve. However there was ultimately an 86% probability of this hike so markets were not unduly concerned when it was announced.

Despite the Fed’s own expectations of a further hike of 0.25% in rates this year with the first cuts in rates not until Spring next year, markets recovered from the initial concern over the guidance but rallied to recover half of those losses buy the weekend. The market expects no further rate rises this year with three cuts of 0.25% by year end leaving the official rate at 4%. The rate is currently 4.75% - 5%.
So why does the market not believe or respect the Fed’s own dot plot as a forecast? It may be that the Federal Reserve disagree with the market’s outlook. The interest rate outlook remains very fluid and has been very volatile as investors navigate their way through the banking crisis.

The Bank of England raised rates as expected although some analysts were arguing for no change as the bank grapples with hotter than expected inflation at 10.4% whilst also factoring the effects of the banking crisis and the increase in tax rates in the new tax year. Despite the gloom, the Bank of England sounded more upbeat and forecast a sharp drop in headline inflation over the coming months. The market does not expect any further hikes in official rates unless there is significant change in inflationary expectations.

EURUSD          +0.96     +0.9%   
GBPUSD          +0.57     +0.47% 
USDJPY            -1.11       -0.84%

Forex markets reacted to the US Dollar by taking the same line as equity traders and investors, whom believe that the Fed has completed its tightening cycle and that rates are more likely to fall by three 0.25% cuts by year end. This pushed the USD Dollar to its lowest level against the Euro since early February. Sterling also rallied against the US Dollar although gains were tempered following the Bank of England’s guidance about future rate rises.

Gold                -10           -0.5% 
UK OIL             +2.39      +3.3%
US OIL             +2.88    +4.34%

Gold has been reacting to the banking crisis more than any further weakness in the US Dollar. Despite the continual focus on the banking sector and the woes of the European banking sector last Friday, Gold has a quiet week, with nerves more intact in the US markets than in Europe. Oil recovered some of the losses from the previous week as equities stabilised but concern remains over the recovery in China following the Administration’s end of the zero-Covid policy.

What don’t we know….yet?

(What traders need to look out for in the week ahead)

The last week in March is already upon us with the first quarter drawing to a close. Whilst the banking crisis has grabbed out attention, it was on 24th February last year that the markets had to contend with Russia invading Ukraine and the resultant surge in energy costs and inflation across the developed and developing world.

This week is expected to quiet, at least on the data front. There are no major central bank’s policy meetings. The most important releases being the inflation data out of Europe, US consumer readings and manufacturing and services data out of China.


Germany                             German IFO business climate. Very broad monthly survey of manufacturers, builders, wholesalers, services, and retailers. Euro and Eurozone assets sensitive to this release.

UK                                          Governor of bank of England, Andrew Bailey, speaking at LSE. GBP and UK equities sensitive


UK                                          Bailey testifying in parliament, to Treasury Select committee, about SVB collapse and contagion in UK banking sector. Traders will on the look out for any cluse about direction of rates considering banking sector turmoil.

US                                          Conference Board Consumer Confidence. Taking a hit from the concerns over the banking sector woes.


No key data


Eurozone                             German and Spanish CPI inflation data. Ahead of the official Eurozone data on Friday. Falling further


China                                     Manufacturing and Non-Manufacturing PMI data. Stumbling, as the effects of zero covid policy take longer to unwind.

Eurozone                             CPI. Flash estimates of headline and core rates. Headline lower again but core rate proving more stubborn and sticky than the markets were hoping. Euro and Eurozone assts sensitive.

US                                          Revised University of Michigan Consumer Sentiment. Unchanged from initial reading as investor confidence continues to improve.


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(Analysis of the popular markets and what we like)

In today’s Podcast Adrian delivers a review of the S&P500, Gold, EURUSD and GBPUSD.

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(Examining a problem many traders face and what to do about it)

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