The ECB raised the interest rate by 0.5%. The US Launches BTFP Program for Banks

By JustMarkets

The US indices rose Thursday after reports that major Wall Street banks pledged billions of dollars to bail out First Republic Bank. JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), and Wells Fargo & Company (WFC) led a group of major banks that will rescue First Republic Bank (FRC) deposits totaling $30 billion. As the stock market closed on Thursday, the Dow Jones Index (US30) increased by 1.17%, and the S&P 500 Index (US500) added 1.76%. NASDAQ Technology Index (US100) gained 2.48% yesterday.

The new Bank Term Funding Program (BTFP) is very popular among banks. The US banks took $303 billion in “cash” from the Fed over the week. Many analysts believe the new BTFP instrument is a hidden quantitative easing (QE) program. In general, if you evaluate the situation in a comprehensive way: bankruptcies of banks in the USA, the problem of Switzerland’s largest bank, and liquidity problems in a number of market segments (government debt). All these are direct consequences of the aggressive increase of rates in response to inflation, which was a consequence of previous unbridled monetary and fiscal policy. The Fed simply has no choice but to shift policy tightening toward easing. The US Federal Reserve’s monetary policy meeting next week will show the FOMC’s reaction.

The Federal Reserve’s cornerstone method for determining whether US banks can survive an economic crisis has had a huge misstep over the years: regulators have not tested a scenario resembling the 2023 economy and current financial conditions. Fed officials promoted annual stress tests as the primary supervisory method for assessing the health and soundness of the nation’s largest banks. According to regulatory experts, a more realistic stress-testing scenario would not have solved the institutional problems that led to SVB’s decline. But the lack of modeling of an interest rate hike does point to a hole in the way Fed officials think about financial risk.

European stocks rose yesterday. Germany’s DAX (DE30) gained 1.57%, France’s CAC 40 (FR40) jumped by 2.03%, Spain’s IBEX 35 index (ES35) added 1.50%, Britain’s FTSE 100 (UK100) closed up by 0.89%.

The ECB raised its rate by 50bp to 3.5% and will start cutting its bonds portfolio by 15bn euros a month. Further monetary policy will be determined by new data on inflation as well as the banking sector. The ECB’s latest set of forecasts, released Thursday, shows that inflation is still slightly above the bank’s medium-term target of 2% in 2025. At the same time, it raised growth forecasts for the single currency bloc and now sees GDP growth of 1% this year.

A rapid drop in US Treasury bond yields has driven the rise in precious metals in recent days. Yields are now near their lowest level since September 2022 amid a dovish revision to the Fed’s monetary policy outlook. Gold is considered a safe haven asset, so it performs well in times of heightened uncertainty, high volatility, and financial stress. Therefore, it is not surprising that it has rallied strongly over the past few trading sessions. If the US Federal Reserve announces its latest rate hike next week, gold and silver prices could get additional support, especially if bank problems worsen.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.80%, China’s FTSE China A50 (CHA50) fell by 0.60%, Hong Kong’s Hang Seng (HK50) ended the day down by 1.72%, India’s NIFTY 50 (IND50) added 0.08%, and Australia’s S&P/ASX 200 (AU200) ended the day up by 0.40%.

New Zealand’s GDP fell by 0.6% in the last quarter. For the RBNZ, this is a clear signal that it is time to cut down the tightening program, as the economy has shrunk faster than the central bank forecasts. If the second quarter of 2023 also sees a decline, it would mean that New Zealand is in about a six-month recession. According to Stats NZ, the decline in manufacturing activity was the biggest contributor to the decline, with the sector down by 1.9%. Overall, 9 of the 16 industries tracked by Stats NZ fell, especially in retail, housing, arts, leisure, and transportation.

S&P 500 (F) (US500) 3,960.28 +68.35 (+1.76%)

Dow Jones (US30)32,246.55 +371.98 (+1.17%)

DAX (DE40) 14,967.10 +231.84 (+1.57%)

FTSE 100 (UK100) 7,410.03 +65.58 (+0.89%)

USD Index 104.44 -0.20 (-0.19%)

• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
• – US Industrial Production (m/m) at 15:15 (GMT+2);
• – US Michigan Consumer Sentiment (m/m) at 16:00 (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.