So, what do we know?
(A forex, index and commodity market review)
Daylight savings shift. Now just a four-hour difference between UK / EU and the US.
US data releases are an hour earlier and all US markets open and close one hour earlier until the EU / UK put our clocks forward on Sunday 26th March when the 5-hour differential with the US will resume.
An interesting move in markets last week as investors were forced to price in more rate hikes for a longer duration. That was then capped at the end of last week with the news of the failure of SVB, Silicon Valley Bank, in California which sent shock waves through the US and global banking industry.
Overnight the US banking regulators have announced that all depositors monies will be repaid in full. This has resulted in a rebound in US futures that got hit on Friday following the news.
Here in the UK, the UK arm of SVB has been bought by HSBC with no use of tax payers money nor any involvement with any compensation scheme. The UK bank was much smaller than its US parent where such a move could have taken a week or more which was unacceptable to the US regulators and their concern about systemic risk.
Another bank called Signature Bank, with a similar although not identical profile to SVB has also being put into admistration by the US regulator as it attempts to calm nerves oncerns about systemic risk in the banking sector as a whole.
Some economists now expect the Fed to keep rates on hold next week – the situation remains very fluid.
Weekly change (amount change and percentage change on the week)
FTSE -198 -2.5%
DAX -150 -0.97%
DOW -1,481 -4.45%
S&P -184 -4.55%
NASDQ -550 -4.71%
NIKKEI +216 +0.78%
Hang Seng -1,247 -6.07%
Equities had a tough week with the S&P500 falling 4.5%, its biggest fall in just under six months, whilst the NASDAQ fell 4.7%, its worst weekly fall for four and a half months.
The market moves in the first three days of March, as we discussed last week’s report, were ultimately proved to be more technical in nature rather than a serious risk-on move that some had cheered. Last week dealt with the reality and underlined the point that the Federal Reserve, lead by Jay Powell, had more work to do that the markets were expecting.
That mini bombshell came early on Tuesday last week with Powell’s testimony in Congress to Senate Banking Committee when he stated the Central bank would be considering larger rate rises if data warranted it.
Markets fell on the news with investors effectively coming to terms with a harder landing for the economy later this year. At one point last week there was an 80% probability of a 0.5% hike in rates.
However, by Friday the probability had fallen sharply with investors now expecting a 0.25% hike. Interest rates are now expected to peak around 5.3% by June whereas earlier this week that peak rate was 5.7%. The market also expects there could be two 0.25% cuts by year end. A very fluid situation which now seems to change almost weekly. The Fed will be deliberating very carefully when they next meet on the 223nd March.
What changed was a mixed Non-farm employment report and the collapse of SVB Bank in California on Friday. Maybe Powell should have brought SVB up with the Senate Banking Committee on Wednesday during his testimony. The employment report was mixed with the headline new jobs number coming in stronger than consensus at 311K. However, investors latched onto the more negative elements in the report such as the fall in hourly earnings and an increase in the unemployment rate to 3.6% against expectations of a an unchanged 3.4% rate.
This was one of the main drivers for a fall in expectations of future rate rises, with the CME Fed watch tool now predicting a 0.25% hike at the next monetary policy meeting on March 22nd. This move was bolstered by news of the failure of the technology focussed California bank Silicon valley bank, which was put into administration by the regulators.
This caused two significant effects in the bond and equity markets. In the equity markets, banking stocks were hit hard as investors reacted to the SVB news and the effect on the US banking sector in general. SVB revealed a loss of $1.8 Bln on the sale of a portfolio of bonds and had attempted to raise further funding but failed and inevitably the regulators to swift action to protect the market by placing the bank into administration.
What causes other banks to fall sharply was concern that other similar banks could be sitting on significant losses in bond portfolios. Paradoxically, the new of SVB’s demise caused a significant flight to the safety of bonds which pushed prices sharply higher as yields fell sharply from recent multi year highs early on in the week.
The 2-Year Note which went above 5% midweek rallied sharply, with the yield tumbling to 4.59%, with a fall of 0.3% on Friday, which was the biggest one-day fall in yields since 2008. The 10-Year bond yield also feel sharply, closing at 3.7% having been above 4% midweek.
UK and European equities were also dragged down by the SVB news as banking stocks fell. The banking sector in Europe has rallied over 20% in the past 6 months but the news sent the banking index down 4.5% which on the surface looks like an over reaction to a more domestic banking failure in the US. The FTSE which has a number of large banks making up the index fell more than its European counter parts, falling 1.4% on Friday.
USDJPY -0.75 -0.55%
The fall in interest rate expectations undermined the US Dollar which had strengthen midweek following Jay Powell’s testimony. Expectations for interest rate hikes are uncertain which means the US Dollar’s trajectory is also more uncertain now. The watershed moment will come when the Fed decide on their next interest rate hike on 22nd March and comments about future rate hikes.
Gold +11 +0.6%
UK OIL -3.24 -3.77%
US OIL -3.21 -4.02%
Gold jumped in Friday following the SVB news which caused a noticeably flight to the safety of Bonds and Gold. The weaker US Dollar also helped Gold rally $37 on Friday, reversing the losses from earlier on in the week. Oil fell in line with equities which had some of their worst falls in 6 months. Economists are in a state of flux over whether the US economy will enjoy a soft landing of whether the Fed’s shifts in monetary policy will cause a mild recession and slightly harder landing. Slowing economic growth inevitable hits oil demand.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Another important week for markets with the ECB’s rate announcement and the US CPI and PPI data. Here in the UK we have the Chancellor’s Annual Budget statement.
No key data today
UK Unemployment data. Claimant count. Am increase after last month’s fall. Not the sort of data that implies a recession.
US Core CPI. Monthly inflation is expected to be the same as last month at 0.4% whilst the headline rate is expected to slow to 6% from 6.4%.
Sticky or persistent inflation has been a bigger worry for the markets more lately so this data will be keenly anticipated. A stronger number than expected could tip the scales more in favour of a 0.5% hike by the Fed next week. USD, and global equities and bonds all very sensitive to this data.
UK Annual Budget statement from the Chancellor. Not much giveaway this time round albeit the economy and government borrowing is in a better place that many thought it would be just 3 months ago. GBP sensitive.
US Empire State manufacturing. The manufacturing sector continues to reel from the sharp increase in rates last year. Investors will be looking for any sign of an improvement. Perhaps not this month….
US Core PPI. The cost of goods and services going into production. A forecast to future inflation trends.
US Retail sales. Further data for investors and the Fed to mull over ahead of the interest rate decision next week.
US Philly Fed manufacturing Index. Another reading of manufacturing from the Philadelphia region. A modest rebound from last month’s sharp drop. Still not in the plus column.
Eurozone ECB’s monetary policy meeting. Another 0.5% interest rate hike taking the Refi rate to 3.5% as the ECB continues to play catchup. Press conference 30 mins after the announcement. Euro, Eurozone and UK equities and bonds sensitive to the announcement.
US Prelim University of Michigan Consumer Sentiment. Sentiment has been picking up but after February’s realisation that inflation appears stickier than most expected it is a wonder that sentiment is not expected to fall back.
What should we be trading?
(Analysis of the popular markets and what we like)
In this week’s video we explored some index charts but mostly the guidance is to be careful of erratic markets. We saw last week how quickly markets can change direction, after Powell’s speech on Tuesday and the Non-Farm data and SVB news at the end of the week. Be mindful, and be if risk averse, be mindful to take profits where you can in order to manage risk.
What’s the problem?
(Examining a problem many traders face and what to do about it)
In today’s Podcast we look at economic data. Given the topics of discussion today, it seemed appropriate to discuss the economic data announcements that would typically have the greatest impact on the financial markets, so Forex, Stock markets and commodities. In this section, Adrian takes 3 minutes to share this with you, how you can find the information and when it happens.