22 Mar

Problems in the banking sector are easing. The US Federal Reserve may raise rates another 0.25% today

March 22, 2023

By JustMarkets

Concerns about problems in the banking sector are easing. The US First Republic Bank (FRC) shares jumped about 30% yesterday after US Treasury Secretary Yellen said the US government would be willing to step in and support smaller banks. Other regional banks also rose sharply on the news. At the close of the stock market yesterday, the Dow Jones Index (US30) Increased by 0.98%, and the S&P 500 (US500) added 1.30%. The NASDAQ Technology Index (US100) gained 2.06%.

The Federal Reserve is expected to raise interest rates by 0.25% today, despite concerns about stress in the banking system. Investors are also waiting for the Fed to reassure them that regional bank problems will be solved. Analysts believe Fed Chairman Jerome Powell will indicate at the press conference that the Fed is fighting inflation by raising rates and then assure markets that the central bank can use other tools to preserve financial stability. If Powell’s press conference speech is dovish and hints at an end to the cycle soon, it will cause the dollar index to fall and stock indices to rise. But if Powell hints that the Fed will continue to tighten policy at future meetings, it could cause another panic rush, which would cause investors to buy dollars again.

ExxonMobil Corp (XOM) shares rose more than 4% after Morgan Stanley expressed optimism about the oil company, citing its “competitive positioning.” Tesla’s (TSLA) stock rose sharply yesterday. The company was supported by retail sales data from China Merchants Bank International, suggesting the automaker will report strong sales in the first quarter.

Cathie Wood, founder, and CEO of ARK Investment Management told Bloomberg TV on Tuesday that her company has more than $2 billion in losses from stock sales during the market crash. Cathie Wood explained that her fund reduced its holdings from more than 50 to just 28 shares. Selling stocks at a loss to offset portfolio gains is a popular strategy investors use during market downturns to cushion the impact.

European stock indices rose on Tuesday. Germany’s DAX (DE30) gained 1.75%, France’s CAC 40 (FR40) jumped by 1.42%, Spain’s IBEX 35 (ES35) added 2.45%, and the British FTSE 100 (UK100) closed yesterday up by 1.79%.

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Years of massive expansion have accumulated a staggering €4 trillion of idle liquidity in the pockets of eurozone banks. Until this stockpile of cash disappears, the ECB can only raise rates by subsidizing the deposits it receives from banks. According to analysts, this is a dangerous course. The assets the central bank holds against these deposits generate returns far below the cost of funding. Calculations by Daniel Gros, a senior fellow at the Center for European Policy Research, show that this is enough to wreck the accounts of the ECB and its constituent national central banks in the coming years. The ECB has begun reducing its investments in securities at a rate of 15 billion euros a month, but this is not enough. All other things being equal, it would take about 27 years to reabsorb all liquidity. The ECB, therefore, urgently needs to launch new tools to get rid of liquidity.

Despite encouraging signs that inflationary pressures are easing, analysts believe the Bank of England is likely to go for a final 25bp hike on Thursday, although this will certainly depend on what happens in financial markets and what the latest inflation data are today. A calmer financial market backdrop would support at 25 basis point hike. Further volatility could easily lead to a “no change” decision, with an evasive indication that further hikes could be taken if things change.

A survey of economists on Tuesday indicates that the Swiss National Bank (SNB) is expected to raise its discount rate by 50 basis points to 1.5%, even though the SNB agreed last week to lend a whopping 50 billion Swiss francs ($54 billion) to troubled local lender Credit Suisse, which UBS then bought out on Monday in a deal struck by local regulators. The US crude inventories rose for a second straight week despite expectations of a decline. The American Petroleum Institute reported that inventories rose by 3.2 million barrels. The US government’s Energy Information Administration will release its oil stockpile data today. Falling inventories will push oil prices higher and vice versa.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) was not trading because of the holiday, China’s FTSE China A50 (CHA50) gained 1.36%, Hong Kong’s Hang Seng (HK50) gained 1.36% on the day, India’s NIFTY 50 (IND50) added 0.70%, and Australia’s S&P/ASX 200 (AU200) was up by 0.82%.

S&P 500 (F) (US500) 4,002.87 +51.30 (+1.30%)

Dow Jones (US30)32,560.60 +316.02 (+0.98%)

DAX (DE40) 15,195.34 +261.96 (+1.75%)

FTSE 100 (UK100) 7,536.22 +132.37 (+1.79%)

USD Index 103.30 −0.40 (−0.39%)

Important events for today:
  • – UK Consumer Price Index (m/m) at 09:00 (GMT+2);
  • – UK Producer Price Index (m/m) at 09:00 (GMT+2);
  • – Eurozone ECB President Lagarde Speaks at 10:45 (GMT+2);
  • – US Crude Oil Reserves (w/w) at 16:30 (GMT+2);
  • – US FOMC Economic Projections at 20:00 (GMT+2);
  • – US Fed Interest Rate Decision at 20:00 (GMT+2);
  • – US FOMC Statement at 20:00 (GMT+2);
  • – US FOMC Press Conference at 20:30 (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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