Central banks around the world cooperate to prevent liquidity problems

March 20, 2023

The US dollar came under pressure last week, falling about 0.8%, which was caused by a sharp drop in US bond yields. Traders and investors reassessed the Federal Reserve’s monetary policy in the US in the face of turmoil in the banking sector. Rates shifted dovish after the collapse of two mid-sized US regional banks heightened fears of financial Armageddon, prompting the Fed to take emergency measures to support depository institutions facing liquidity shortages. Late last week, the Fed injected $4.4 trillion into the Bank Term Funding Program (BTFP) to help banks. Many analysts consider this a hidden “quantitative easing” (QE). At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 1.19% (+0.13% for the week), while the S&P 500 (US500) fell by 1.10% (+2.13% for the week). The Technology Index NASDAQ (US100) lost 0.74% on Friday (+5.33% for the week).

This Wednesday is the important monetary policy meeting of the Fed, where the interest rate decision will be made. Market pricing is currently leaning toward a quarter-point interest rate hike, a move that would raise the cost of borrowing to 5.00%. The FOMC is likely to stress the importance of maintaining financial stability and its willingness to act to prevent the materialization of systemic risks. But there could be surprises, as GS strategists expect that the US Fed may announce the end of its tightening cycle. The implications of this announcement could lead to a further weakening of the US dollar.

The US Fed, the ECB, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank from March 20 to the end of April, will conduct swap transactions between central banks on a daily basis rather than once a week. The reason is that central banks are preparing for bank liquidity problems.

Equity markets in Europe were mostly falling on Friday. German DAX (DE30) fell by 1.33% (-4.32% for the week), French CAC 40 (FR40) dropped by 1.43% (-3.97% for the week), Spanish IBEX 35 (ES35) lost 2.01% (-6.06% for the week), British FTSE 100 (UK100) was down by 1.01% (-5.33% for the week).

UBS Group AG agreed to buy Credit Suisse Group AG in a historic government-brokered deal aimed at curbing the crisis of confidence that has begun to spread to global financial markets. The Swiss bank will pay 3 billion francs ($3.3 billion) for its rival. The deal includes extensive government guarantees and liquidity provisions. The Swiss National Bank is offering UBS 100 billion francs in liquidity assistance, while the government is providing a guarantee of 9 billion francs to cover potential asset losses that UBS is taking on.

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The International Criminal Court has issued arrest warrants for Russian President Vladimir Vladimirovich Putin. The ruling states that Putin is responsible for the war crimes of illegally deporting populations (children) and illegally transferring populations (children) from the occupied territories of Ukraine to the Russian Federation.

After a slight pullback on Thursday, gold prices resumed gains on Friday, rising more than 2%. Gold (XAUUSD) and silver (XAGUSD) are inversely correlated to US government bond yields. The turmoil in the banking sector has led to a drop in government bonds, which contributes to the strengthening of precious metals. But analysts expect a corrective movement as the situation begins to stabilize.

Fears of banking sector problems led both benchmarks of oil to their biggest weekly decline. Last week, Brent crude oil futures fell by 12%, while US West Texas Intermediate (WTI) crude fell by 13%. But analysts still expect tight global supply to support oil prices for the foreseeable future. OPEC+ representatives attributed the price decline to financial factors rather than supply and demand imbalances, adding that they expect the market to stabilize. Asian markets mostly declined last week. Japan’s Nikkei 225 (JP225) decreased by 1.98% for the week, China’s FTSE China A50 (CHA50) lost 0.88% for the week, Hong Kong’s Hang Seng (HK50) added 0.55% for the week, India’s NIFTY 50 (IND50) was down by 2.29%, and Australia’s S&P/ASX 200 (AU200) was negative by 2.10% for the week.

On Monday, the People’s Bank of China (PBOC) kept its annual LPR at 3.65% while the five-year LPR, which is used to determine mortgage rates, was kept at 4.30%. Both lending rates are the lowest in two decades. China’s central bank said Friday that for the first time this year, it would reduce the amount of cash banks must hold as reserves to help maintain sufficient liquidity and support the nascent economic recovery. The central bank has not yet estimated how much long-term liquidity will be released after the cuts, allowing banks to lend more money. Analysts estimate that the move freed up more than 500 billion yuan ($72.6 billion). Central bank governor Yi Gang said at a March 3 news conference that China’s real interest rates are at acceptable levels and that cutting banks’ reserve requirements will continue to be an effective tool to support the economy.

In the commodities market, futures on silver (+10.94%), lumber (+9.2%), gold (+6.77%), wheat (+4.42%), palladium (+3.87%), and corn (+2.84%) futures showed the biggest gains last week. Futures on WTI oil futures (-13.24%), Brent oil (-12.45%), gasoline (-5.81%), copper (-3.36%), and natural gas (-3.29%) showed the biggest drop.

S&P 500 (F) (US500) 3,916.64 −43.64 (−1.10%)

Dow Jones (US30)31,861.98 −384.57 (−1.19%)

DAX (DE40) 14,768.20 −198.90 (−1.33%)

FTSE 100 (UK100) 7,335.40 −74.63 (−1.01%)

USD Index 103.86 −0.55 (−0.53%)

Important events for today:

– China PBoC Loan Prime Rate at 03:15 (GMT+2);
– German Producer Price Index (m/m) at 09:00 (GMT+2);
– Eurozone Trade Balance (m/m) at 12:00 (GMT+2);
– New Zealand Trade Balance (q/q) at 23:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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Central banks around the world cooperate to prevent liquidity problems