Central bank commitments don't seem to help risk sentiment

Good morning

Global equities had another rough day on Friday as concerns over the banking crisis continued and futures prices this morning suggest further downside for equities today. The news that UBS has stepped in to buy Credit Suisse has done little to really help markets, no great surprise given the fact UBS have paid just $3.15billion against a valuation last year of some $570bn shows the damage done to CS in recent months but also the potential scale of toxic assets held by the beleaguered firm. Have UBS snapped up a bargain or a poisoned chalice? At that price I’d think it’ll be OK although with UBS shares over 10% lower this morning, I’m not sure everyone agrees.

The Fed, along with five other major central banks have also announced action to help ensure appropriate liquidity is US dollar swaps, showing really their concern at the current state of the financial markets. In fact although this action should help sentiment, there is now a question of whether they know something that we don’t, such as more bad news to upset the markets.

This concern did not stop ECB raising rates 50bps last week but expectations for the Fed on Wednesday have dropped from 50bps rise just a couple of weeks ago to a smaller rise of 25bps, although no change, perhaps even a cut, is not ruled out. BoE are expected to raise rates 25bps to 4.25% on Thursday. Plenty of volatility ahead.

GBP seems to be coming out ahead of other majors, with GBPUSD trading at 1.2210 as I type, EURUSD at 1.0660 which puts GBPEUR 1.1450. GBP certainly seems to have put last years turmoil behind it and for the time being at least looks pretty healthy. Gold has traded above $2000 for the first time since almost a year, while Bitcoin has also enjoyed this bout of USD weakness, trading up to $28,500, actually something of a long-term pivot area. I’m never going to try to forecast Bitcoin, as many of you know I think its real value should be minimal, but further gains look quite likely, something ironic that there is talk of Bitcoin as a safe haven doing the rounds.

Meanwhile credit agencies are downgrading banks, Moodys and S&P have lowered First Republic Bank rating, ‘locking the barn door after the horse has bolted’ springs to mind.

Putin made a surprise visit to Mariupol over the weekend where he could see first-hand the devastation inflicted on the Ukrainian city. Putin will meet China’s Xi today in Moscow with Ukraine no doubt high on the agenda, Russia may well be looking for China to provide armaments, but bear in mind China will do nothing unless it is in its own interests. Whether Xi is on a peace-finding mission or a show of support for his ‘ally’ remains to be seen, but as you know his idea of peace in Ukraine would likely involve Ukraine giving up vast parts of the country to Russia. That’s not going to work.

Congratulations for Ireland for winning the Six Nations, and the grand slam along with it. England looked like they may make a game of it until Englands Steward was handed a red card for a collision that looked nasty but was debatable as to whether it was dangerous play given he did seem to be pulling away. Looked like a harsh decision to many and one that really put Englands chances of a surprise victory well out of reach.

Not much in the way of data today, looking forward to hearing from Lagarde later, but let’s face it, the main event this week should be Wednesdays FOMC rate announcement, although even this is overshadowed in part by the ongoing banking crisis.

- 14.00/16.00 ECBs Lagarde speaks

- 20.00 NZ Westpac consumer surbey

- 21.45 NZ trade balance

- 00.30 RBA minutes

Calm didn't last for long....will bank crisis impact ECB rate decision today

Good morning

US data releases will be one hour earlier at 12.30 or 14.00 london time due to the US clock changes that took place at the weekend.

In addition, FX option expiries will be 14.00 london time, not the usual 15.00 london time.

This will be until Sunday 26th when we change our clocks in the UK

European stock markets were rattled yesterday on renewed concerns of a possible Credit Suisse collapse after their shares fell some 30% yesterday. Key indices in Europe were down between 3-4%, US and Asian equities also traded generally lower although not quite to the same extent, down around ‘only’ 1-2%.

Credit Suisse is looking very sick and it is difficult to see what can save it. I recall that one of its largest shareholders, Harris Associates, sold its entire holding just a couple of weeks ago and I’m sure many people with money at Credit Suisse will have been withdrawing funds. It’s a pretty bad time for a firm like CS to raise money and seek new investors. Mind you Saudi National Bank, now CS’s largest shareholder, have said panic over CS is unwarranted.

SNB have said they will provide liquidity to Credit Suisse if required, reports are CS will borrow some CHF50 billion from SNB under a short term facility. Really, any bank that needs to borrow that sort of sum is surely no longer a viable entity, but time will tell whether this gives any customer or counterparty of CS any confidence. Larger US banks are currently reported to see risks to Credit Suisse as manageable.

Meanwhile US based First Republic Bank which came under pressure after the SVB and Signature Bank collapse has said selling the bank is one option as they look at ways of shoring up liquidity.

All this turmoil has greatly affected interest rate expectations. I have already said forecasts for the US Fed range from a cut of 25bps to a rise of 50bps, many banks now seeing a lower peak in rates. Today we have the ECB rate announcement, the expectation has been for a 50bps rise, this has been almost fed to us on a plate for some time. However the potential for a smaller rise, or no rise at all, cannot be ignored. I’m thinking they will still go for the full 50bps which should be EUR positive. EURUSD now 1.0610, I’d imagine it would be higher if it wasn’t for the CS news and recent safe haven USD buying.

GBPUSD meanwhile is 1.2075, having broken below my 1.2140 level soon after sending my report yesterday morning. It traded down to 1.2010 yesterday, has managed to recover some of those losses. It is at 1.1380 against EUR and has held its ground against most other major and minor currencies.

I’m out of the office tomorrow morning so have added in tomorrows calendar below. Tomorrow happens to mark the three year anniversary of the date we vacated our office in Farringdon just ahead of Covid lockdowns, indeed on this actual day three years ago I was sitting in a pub near the office with a pint of Corona when the PM announced that we should work from home, avoid travel and avoid pubs. Quite a momentous occasion, a very odd feeling and only a few days later a full lockdown was officially announced.

While Covid is still very much among us, hospitals are no longer as overwhelmed as they were and overall I think we did a pretty good job of dealing with the outbreak, although I know there is still plenty of opposition to lockdowns and vaccines. Can’t please people all of the time. Mind you it does feel a little like ‘out of the frying pan, into the fire’ as we move from one crisis to another. Never a dull moment that’s for sure.

- 12.30 US philly fed survey, building permits, initial jobless claims

- 13.15 ECB rate announcement

- 13.45 ECB press conference

- 15.15 ECBs Lagarde speaks

Friday

- 10.00 EU HICP

- 14.00 US Michigan sentiment survey

Some calm returns to markets, US CPI as expected

Good morning

US data releases will be one hour earlier at 12.30 or 14.00 london time due to the US clock changes that took place at the weekend.

In addition, FX option expiries will be 14.00 london time, not the usual 15.00 london time.

This will be until Sunday 26th when we change our clocks in the UK

A little calm returned to the equity markets as US and Asian exchanges mostly finished on a positive note as contagion risks from the SVB and Signature Bank collapse seem to have diminished somewhat. Rating agencies have downgraded other US regional banks but for the time being things have settled down.

US inflation came out pretty much bang in line with expectations, the US dollar turned one way, then the other, and ended up pretty much where it started. GBPUSD now 1.2160, EURUSD 1.0735, both not far from levels we saw this time yesterday. An interesting support area appearing in GBPUSD around 1.2140 which has been tested several times since Monday afternoon, holding each time. GBPEUR a little lower at 1.1325 but still holding up pretty well.

US retail sales are out this afternoon but more attention is turning to ECB rate announcement tomorrow where a 50bps rise is still the most likely outcome, the question really is how high will rates go from there. Talking of rates, obviously attention is still on the Fed next week which could see anything from a cut of 25bps to a rise of 50bps. Can’t remember a meeting that has such a spread of possibilities. Bowman spoke yesterday but due to the blackout period ahead of the Fed meeting gave little away with regard to policy changes but did make clear the Fed were monitoring developments in the US banking system, adding that at the moment it seems fairly steady and resilient.

Before then of course we have the UK budget, where confirmation of the rise in corporation tax from 19% to 25% is still likely but I think the Chancellor will be very cautious about making too many dramatic changes after the shenanigans last year and ongoing uncertainty over the economic outlook.

HSBC have adjusted their USDJPY forecasts for Q2 and Q3, to 130 and 125 from 125 and 122 respectively but still look for a drop to 120 by year end. With USDJPY currently 134.55 this does give a lot of profit potential if they are right although do bear in mind there is quite hefty cost of carry for long yen positions. Might see if I can find some cheap downside trades though just in case.

- 10.00 EU industrial production

- 12.30 UK budget

- 12.30 US retail sales, PPI

- 21.45 NZ GDP

- 23.50 Japan trade

- 00.00 AUS consumer inflation expectation

- 00.30 AUS unemployment

- 04.30 Japan industrial production