So, what do we know?
(A forex, index, and commodity market review)
The start of a new month and a new quarter as we leave behind a quarter of three contrasting months. In January we had a rally in equities with bond yields stable and reflecting an expected slow down in the Fed’s tightening cycle. This balloon was burst in February with persistent core inflation providing the Fed with a further headache. Equities fell and bond yields rose as investors priced in higher rates and the prospect of a hard-ish landing for the US economy. March changed all that with the mini-banking crisis with a sell off in equities and sharp reversals in sovereign bonds.
Last week the risk on move following the banking crisis-swoon, has seen equities rebound and bonds fall as markets continue to calm down following this mini-banking crisis.
Hedge funds and other leveraged investors bore the brunt of the banking crisis as these leveraged funds closed bearish trades on sovereign bonds as yields collapsed and equities fell.
The big question three weeks ago was this another crisis that would spread through the banking industry.
The short answer is no – the so-called banking crisis was limited to a small number of badly run banks that took out leveraged bets on sovereign bonds pre the jump in inflation. The immediate crisis may be over but there remains a big question about how banks will react and whether they will tighten lending criteria.
This is more poignant than ever as the commercial real estate sector in the US has slumped and those real estate companies and funds may well find that, despite an adjustment in intertest rate expectations, the availability of credit will come at a higher price than was the case before our mini-banking crisis. The load of commercial real estate debt in the banking sector will be the topic of conversation for weeks to come as commercial property continues to struggle following the Fed’s rapid hike in rates over the past 12 months. This is even more acute in the EU where commercial real estate stocks have been battered, having fallen 24% in March despite a rally in the Stoxx600 index. The MSCI Europe Real Estate Index is now down to its lowest level since the great financial crisis of 2009.
Weekly change (amount change and percentage change on the week)
FTSE +226 +3.06%
DAX +671 +4.49%
DOW +1,036 +3.22%
S&P +138 +3.48%
NASDQ +397 +3.37%
NIKKEI +656 +2.3%
Hang Seng +484 +2.43%
The risk-on move in global markets extended further last week, as US consumer confidence builds and the preferred measure of inflation used by the FED falls more than expected.
The S&P 500 and NASDAQ continued to power ahead last week as investor’s confidence continued to build. Stocks closed out the week on their highs following better than expected PCE inflation data which pushed the NASDAQ up 3.37% on the week and the S&P500 up 3.48%. In Quarter 1, the NASDAQ rallied 16.8% which is the best performance since Q2 2020 during the pandemic rebound. Tech stocks benefitted in March from the roll back in intertest rate expectations, in the wake of the mini-banking crisis.
The S&P500, representing the broader market, closed out the quarter up 7%, in the shade of the NASDAQ.
Investors were quick to realise that Tech stocks were less vulnerable from a banking crisis, but those same stocks enjoyed the benefit of a less hawkish interest rate outlook.
European equities faired less well with the FTSE100 the weaker index as the banking crisis, albeit a US focussed event, succumbing to a wave of selling as investors weighed up the effects of riskier participants and the tightening of credit conditions and more benign intertest outlook weighing on the sector. The DAX was more aligned to the US tech sector as the DAX40 rallied 1,865 points or just over 13%.
EURUSD +0.57 +0.53%
GBPUSD +1.00 +0.82%
USDJPY +2.01 +1.53%
The US Dollar gave up more ground as the risk-on move in markets continued. The US Dollar index touched its lowest level since early February but backed away Friday to close the week just 0.5% down on the week. Whilst the better than expected PCE data last Friday might be welcomed by investors, the OPEC news over the weekend might see a further adjustment in interest rate expectations.
Gold -10 -0.5%
UK OIL +4.97 +6.64%
US OIL +6.48 +9.36%
Gold traded in a sideway pattern last week as the US dollar recovered some last ground at the end of the week. Hedge funds remain long gold following the banking crisis.
Rate expectations have hardened a little from the depths of the mini-banking crisis with expectations now for just one further hike of 0.25% and with year-end rates expected to be back to the 4.25 – 4.50% level.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
The start of new month and new quarter sees the update from OPEC (already out) and Australia and New Zealand monetary policy meetings ahead of a shortened Easter week.
China Bank holiday for three days in observance of tomb sweeping!
OPEC The oil cartel announced a surprise cut of 1 MBd in oil production following a fall in crude oil prices in Q1. The US and other developed economies wont be happy with the Biden administration particularly sensitive to anything that thwarts the efforts by the Federal Reserve to reign in inflation.
US ISM Manufacturing PMI data. Slightly weaker but well below the key 50 level that marks the level between contraction and expansion in the sector.
Australia RBA meets to decide monetary policy. Another 0.25% hike in rates as the RBA raises rates for the 12th consecutive time. AUD sensitive.
New Zealand RBNZ meets to decide next move in rates. As with the RBA, the RBNZ is expected to raise rates by 0.25%. NZD sensitive.
US ADP non-farm employment change. 208K expected.
US ISM services PMI. Service sector readings have been much better than the manufacturing sector as expected following the sharp increase in rates over the past 12 months. However, the service sector is not improving albeit remains comfortably above the important 50 level.
No key data
UK, EU, US Australia
New Zealand Bank holiday. Markets closed. Not officially Federal holiday in the
US although holiday in many states. All US markets closed.
US Non-farm employment change. 235K new jobs. Employment rate at 3.6% with a small uptick in average earnings, which fell last month. USD, equities and bonds sensitive to this data. Will have to wait for Sunday night / Monday morning for the market reaction.
What should we be trading?
(Analysis of the popular markets and what we like)
In today’s podcast, we look at the key support and resistance levels for EURUSD, GBPUSD, GBPJPY, SPX500, UK100 and Brent Crude Oil.
What’s the problem?
(Examining a problem many traders face and what to do about it)
With two central banks announcing their latest interest rates and non-farm employment change this week, I thought it would be a good idea to discuss holding trades over major economic data. Watch and learn how risk-averse day traders and swing traders should manage their positions over important events.