Archive for Economics & Fundamentals – Page 118

23 Mar
stock market investing

Federal Reserve bows to bank-crisis fears with quarter-point rate hike, letting up a little in its fight against inflation

By Jeffery S. Bredthauer, University of Nebraska Omaha; Arabinda Basistha, West Virginia University; Joerg Bibow, Skidmore College, and Marketa Wolfe, Skidmore College 

The Federal Reserve raised interest rates by a quarter-point on March 22, 2023, bowing to market expectations that it would temper its aggressive program of rate hikes amid a still-brewing banking crisis.

The U.S. central bank lifted rates to a range of 4.75% to 5%, its ninth-straight increase since March 2022. As late as early March 2023, it appeared that the Fed was planning to resume last year’s full-throttle rate-hiking campaign after slowing down in February. But the collapse of Silicon Valley Bank on March 10 forced the central bank to take a step back.

So what does the Fed’s announcement tell us about where monetary policymakers think the economy – and inflation – are heading? A team of economists and finance scholars have weighed in to help make sense of it all.

Rate hike shows Fed confident in banking sector

Jeffery S. Bredthauer, University of Nebraska Omaha

This muted rate hike signals that the Fed is being cautious in order to steady the financial sector, which has been struggling since the collapse of Silicon Valley Bank on March 10, 2023. But the fact that the Fed raised rates at all acknowledges that the fight against inflation will need to continue.

While still an increase, it’s more of a pause, in my view, because until the recent banking turmoil, the central bank was expected to lift rates by a half-point. Inflation has remained stubbornly elevated even though the Fed had jacked up rates 4.5 percentage points before the latest hike, and Chair Jerome Powell made it clear in congressional testimony that he was intent on subduing the rise in prices.

But the aggressive rate rises left some regional banks like Silicon Valley Bank vulnerable because they drove down the value of tens of billions in assets they held. Silicon Valley failed because it didn’t have enough assets to meet withdrawals.

While the Fed and other regulators have acted to shore up the system by backstopping depositors and smaller financial institutions, the concern now is that there may be more banks in a similar predicament. The smaller rate hike should help ease some of these concerns.

Yet, the inflation battle must go on, and the Fed recognizes that strong demand continues to prop up consumer prices, particularly in the service sector. As such, I believe the Fed news shows that it has confidence in the banking system by continuing its interest rate hikes, albeit at a slower pace than had previously been expected.

And this is important. The greatest fear would be that spooked customers might irrationally start withdrawing money from banks because they fear a financial collapse – the classic bank run. That will not happen as long as there is faith in the banking system.

Drop in inflation gave Fed breathing room to ‘pause’

Joerg Bibow and Marketa Wolfe, Skidmore College

The Fed had two courses of action available when it came to setting rates. The first would have seen it continue aggressively raising rates, ignoring financial stability concerns – perhaps even seeing the hiking campaign as a sort of bloodletting that would squeeze inflation out of the economy. The second way forward would be to take a beat and see how the ongoing fragility in the banking sector plays out first.

Fortunately – in our view – the Fed did not choose the former.

While falling short of a total pause in raising interest rates – an option some market watchers had been calling for – the latest hike represents a substantial slowdown from the Fed’s previous plans, and therefore demonstrates the Fed’s caution in the face of a nascent banking situation.

It was able to do this in large part because there are clear signs inflation has come down.

As measured by the Personal Consumption Expenditure Price Index – the Fed’s preferred measure – inflation has declined from a 40-year high of 7% in June 2022 to 5.4% in January 2023.

And the main cause of the recent surge in inflation – COVID-19 supply chain disruptions – has eased. In addition, an upward wage-price spiral has not developed.

Furthermore, the banking turmoil might have already delivered an equivalent of another interest rate hike in terms of its impact on the economy.

Although inflation remains high by historical standards, the risk it will reaccelerate seems low. Altogether, this allowed the Fed to take a breath and deal with what’s going on in the banking sector.

Put another way, the Fed decided, with so much uncertainty about the impact the recent turmoil will have on the economy, the risk of causing more damage was greater than the risk of inflation.

Interest rates may peak soon

Arabinda Basistha, West Virginia University

A big question on Fed watchers’ minds has been when will the central bank stop raising rates or when will it settle on a “terminal” rate – that is, the level that monetary policymakers believe will ensure prices are stable.

That point may be just around the corner.

In September 2022, Powell said the Fed was trying to get to “a place where real rates are positive across the yield curve.”

Real interest rates are a measure of the real, inflation-adjusted cost of borrowing, which is calculated by subtracting expected inflation rates from nominal interest rates. A yield curve shows yields for bonds of different maturities.

Back in September, part of the yield curve was negative, meaning annual inflation was higher than the interest rates. Today, more of the curve has turned positive, which means the Fed is closer to Powell’s goal.

Moreover, Powell switched from declaring that “ongoing” rate rate hikes “will” be needed to the softer “some additional” increases “may be appropriate,” which suggests it sees the light at the end of the interest rate tunnel. Powell also acknowledged that the banking sector stress can work in a way similar to an interest rate hike by reducing inflationary pressures via lower business activity.

Overall, it seems that the Fed is much closer to its policy destination with one or two moderate interest rates increases left in this year, if inflation risks evolve according to expectations. I see a pause in interest rates as early as fall when they settle at a terminal rate of around 5.5%.The Conversation

About the Author:

Jeffery S. Bredthauer, Associate Professor Of Finance, Banking and Real Estate, University of Nebraska Omaha; Arabinda Basistha, Associate Professor of Economics, West Virginia University; Joerg Bibow, Professor of Economics, Skidmore College, and Marketa Wolfe, Associate Professor of Economics, Skidmore College

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions
23 Mar

Recap: FX market reactions to BOE, SNB, Fed decisions

By ForexTime

This week’s highly-awaited major central bank decisions have come and gone.

And all 3 major central banks largely adhered to market expectations for the respective rate hikes.

After all, policymakers were certainly aware that market nerves are still raw after enduring the financial turmoil on both sides of the Atlantic, engulfing names like Silicon Valley Bank and Credit Suisse.

It wouldn’t have been in their best interests to spook markets further.

Hence, the following rate decisions resulted in relatively subdued volatility in FX markets.

 

Before we recap the various central bank decisions, first a reminder:

  • FX markets tend to “reward” and strengthen the currency of the central bank that can push its own interest rates higher (relative to other economies)
  • However, as we’ve seen of late, a currency’s movements also can be driven by market sentiment surrounding its economic performance. When confidence is weak, that tends to translate into currency weakness.
    Hence, no surprise that the US dollar and the Swiss Franc were roiled amid the sudden chaos engulfing Silicon Valley Bank and Credit Suisse over the past two weeks.

 

Now time for the recap, starting with the most recent:

  • The Bank of England (BOE) hiked by 25 basis points (bps).

Just an hour ago, the BOE was also able to sound a hawkish note and signal more UK rate hikes ahead, while forecasting that the UK economy will dodge a recession this year.

After all, the UK January consumer price index (used to measure headline inflation) that was released yesterday (Wednesday, March 22nd) showed that inflation remains stubbornly in double-digit territory. The CPI climbed by 10.4% in January 2023, compared to January 2022 (year-on-year).

Such an outlook by the central bank helped GBPUSD sustain recent gains.

 

 

  • The Swiss National Bank (SNB) hiked by 50 bps.

Also today (Thursday, March 23rd), the SNB prioritised its fight against inflation and suggested that more rate hikes are incoming.

The SNB issued such hawkish signals despite the recent financial turmoil surrounding Credit Suisse.

Still, today’s rate hike was unable to prevent the Swiss Franc from weakening against its G10 peers.

Despite the CHF strength as the immediate reaction to the lager 50bps hike by the SNB (relative to the Fed and BOE), the Swiss Franc was unable to hold on to those gains against the US dollar.

 

 

  • The US Federal Reserve (Fed) hiked by 25 bps.

On Wednesday, Fed Chair Jerome Powell insisted that policymakers remain focused on conquering inflation with more rate hikes.

However, markets were willing to challenge Powell’s narrative!

Markets now pricing in a 70% chance that the Fed would actually CUT interest rates in July 2023!

Such dovish repricing pushed the US dollar index down to its lowest levels since early February, and the greenback is still evidently struggling today.

 

 

What’s next for FX markets?

Investors and traders will still be busy deciphering the next moves by these major central bankers.

And such outlooks will be informed via the regular menu of tier-1 economic data out (think inflation and jobs data)of these major economies.

Of course, markets will also be keeping a close eye on signs of further instability in the US and European banking sectors.

If the contagion spreads and sends the global financial system into yet another crisis, that would roil global financial markets.

Ultimately, as mentioned earlier, markets are likely to weaken the currency that’s closest to ground zero of the financial turmoil, as the US Dollar and the Swiss Franc experienced in recent weeks.

On the flip side, should investors and traders make a run for the hills, safe havens such as gold and the Japanese Yen should ultimately benefit.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
23 Mar

U.S. Money Supply Deflates 2% Annually (What That Means)

The debt bomb implodes: Expect recession and deflation;

By Elliott Wave International

Many pundits have expressed worry about the ramifications of global debt — and rightly so. As the Wall Street Journal noted toward the end of 2022:

The world has amassed $290 trillion of debt and it’s getting more expensive to pay for it.

In the U.S. alone, the cost of servicing the national debt is expected to skyrocket over the next decade (Fox News, Feb. 27):

Interest payments on the national debt to reach $1.4 trillion annually in 2033: CBO

There’s also the issue of household debt in the U.S. That debt bomb is already in the process of imploding. Here’s a chart and commentary from our March Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets:

DebtBomb

A rare shift in the mindset of consumers started in March 2020, when Real Total Consumer Credit began to decline. Since August 1982 … the growth in U.S. consumer debt has been almost straight up. But there were two prior episodes in which American consumers’ otherwise insatiable appetite for debt dissipated: from December 1989 to October 1992 and from December 2008 to November 2011. Both periods encompassed economic recessions. It happened again starting in March 2020, but this time, real consumer debt failed to recover to new highs with the economy.

Another important point to make is that the balance sheets of the European Central Bank, the Bank of England and the Federal Reserve have been deflating — and so has another key measure.

This chart and commentary are also from our March Global Market Perspective:

USM2

More deflation evidence comes in the form of overall money supply in the U.S. … The chart shows the annualized percentage change in M2 since 1981. Apart from a very brief (one week!) foray into negative territory in 1995, money supply in the U.S. has been inflating for at least 40 years. Now, though, money supply is deflating at a current annualized clip of over 2%. This historic and now twelve-week-long contraction in money on this basis looks like it is becoming embedded.

It’s also a good idea to keep an eye on major worldwide stock indexes. History shows that global economies tend to follow global stock indexes. In other words, when stock markets tank, economies generally follow and vice versa.

You can get a handle on the main trends of global stock indexes by using the Elliott wave method.

If you’re unfamiliar with Elliott wave analysis, read Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

[Elliott] did not specifically say that there is only one overriding form, the “five-wave” pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

If you’d like to read the entire online version of the book for free, you may do so by joining Club EWI, the world’s largest Elliott wave educational community.

A Club EWI membership is also free and members enjoy free access to a wealth of Elliott wave resources on investing and trading.

Join Club EWI now by following this link: Elliott Wave Principle: Key to Market Behavior — get free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Money Supply Deflates 2% Annually (What That Means). EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Economics & Fundamentals Financial News
22 Mar

Was the Federal Reserve’s Big Decision on rate hikes really a decision at all?

By George Prior

The US Federal Reserve’s ‘big decision’ on interest rates was not really a decision at all, says the CEO of one of the world’s largest independent financial advisory organizations, after the US central bank announced a quarter point hike on Wednesday.

Nigel Green of deVere Group’s comments follow Fed Chair Jerome Powell confirming a widely expected 25-basis point hike at the conclusion of a two-day monetary policy meeting.

The deVere CEO says: “Expectations on what would be the outcome of the meeting have been shifting throughout the month.

“After Powell told a Senate committee earlier in March that inflation was still too high, expectations went from 25 basis points to 50 basis points.

“But then, days later, with the collapse of Silicon Valley Bank and Signature Banks, sparking fears about a banking crisis and a potentially global negative impact, some commentators expected no rate increase in March based on the news.

“The Fed’s dilemma of taming stubbornly high inflation without setting light to the banking system and causing financial instability has been dubbed as ‘The Big Decision.’

“However, we are of the opinion there was not rally a Big Decision here. If they did more than 25bps, it could trigger more instability and to do nothing could be seen as negligent.”

He added that the Fed must proceed with caution, stating that mistakes of the past are coming back to haunt the US central bank.

“The Fed didn’t act quickly enough to tame inflation from the beginning. They resisted raising interest rates from near-zero levels for most of 2021, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues,” he notes. “This all leads to sky-high inflation – and especially wage inflation.”

It would seem that the Fed hasn’t learned the lessons from the 1980s.

“During much of the 1970s, the US central bank refused to roll out rate hikes, probably due to political pressure from leaders unwilling to allow higher unemployment on their watch.

“Of course, this made workers keep asking for ever higher salaries, which forced businesses to keep increasing prices to compensate, and which led to the infamous 1980’s wage-price spiral and the recession.”

In a media statement on Monday, Nigel Green said that investors are now ready to build their investment portfolios with new money amid a growing consensus that looser monetary policies from the Fed and other major central banks are coming which will boost financial markets.

It came after the Federal Reserve, the Bank of England, Bank of Japan, Bank of Canada, the European Central Bank and Swiss National Bank all vowed to keep credit flowing in the serious issues affecting the banking sector, showing that they are willing to do whatever it takes to avert a crash.

“Investors are taking this as a sign that central banks will now ease off interest rate hikes. Looser monetary policies will trigger a surge in financial markets.

“Not wanting to miss out on the next rally, clients are now telling our consultants around the world that they want to build-up their investment portfolios with new money,” he said.

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

Economics & Fundamentals Financial News
22 Mar

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

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%.

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.

Economics & Fundamentals Financial News
21 Mar

What does ‘moral hazard’ mean? A scholar of financial regulation explains why it’s risky for the government to rescue banks

By Cassandra Jones Havard, University of South Carolina 

“Moral hazard” refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages.

The concept describes financial recklessness. It has its roots in the advent of private insurance companies about 350 years ago. Soon after they began to form, it became clear that people who bought insurance policies took risks they wouldn’t have taken without that coverage.

Here are some illustrative examples: Having worker’s compensation insurance could potentially encourage some workers to stay out of work longer than needed for their health. Or, homeowners insurance may explain why a homeowner might not bother spending their own money on a small repair not covered by their insurance policy because they figure that over time it will turn into a larger problem that would be covered.

Or think of what happens when someone rents a car and parks it where it can easily be damaged. That carelessness reflects an assumption that the rental car company’s insurance policy will pay for the repairs.

Why moral hazard matters

U.S. banks are insured by the Federal Deposit Insurance Corporation, or FDIC, and the risk-takers are both banks and the bank’s depositors.

Congress established the FDIC during the Great Depression, which began with a spate of bank runs. The goal was to boost confidence in the banking system.

The Dodd-Frank Financial Reform Act, enacted after the 2008 financial crisis, was supposed to reduce moral hazard. One way it did that was by making it clear that accounts of more than US$250,000 aren’t insured by the FDIC unless the bank’s failure presents a systemic risk to the financial system.

The implicit assumption behind the government’s insurance limit, which prior to 2008 stood at $100,000, is that depositors who have accounts worth more than the limit will bear the loss of bank failure along with the bank’s executives and shareholders. Yet boosting the size of the guarantee amount also made future bank bailouts more costly, which in turn increased moral hazard.

And when Silicon Valley Bank failed in March 2023, all its depositors got access to their funds – including those with accounts that exceeded the $250,000 limit – because the government made an exception.

‘Too big to fail’

I teach and write about moral hazard in the banking industry
as a banking law professor. As it happens, my banking law class had discussed moral hazard and bank failure for three class sessions held before the 2023 spring break.

When the students returned from their vacation, news of Silicon Valley Bank’s failure appeared to be the start of what might become a bank crisis.

“What happened? It’s completely different from what you taught us!” the students in my class exclaimed, almost in unison. Questions tumbled from their heads demanding an explanation.

Why did the government apparently throw out concerns about moral hazard when SVB failed?

Any explanation would have to begin with what moral hazard can mean in the context of banking, which can summon the colloquial phrase “too big to fail.”

That controversial concept applies to how the government responds in the aftermath of the risky behavior of a bank – if the collapse of the bank is likely to harm the economy. Yet, in reducing the risk of a widespread financial crisis, the government can end up sending the message that it’s willing to protect banks that engage in reckless behavior – and to shield their customers from the consequences.The Conversation

About the Author:

Cassandra Jones Havard, Professor of Law, University of South Carolina

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Financial News
21 Mar

The March to New Highs

Source: Michael Ballanger  (3/20/23)

Michael Ballanger of GGM Advisory Inc. shares his thoughts on the current state of the stock market, the Silicon Bank Failure, and what stocks he believes should be on your radar.

The week that ended in Saint Paddy’s Day celebrations around the world will be long remembered as the week in which investors around the world finally woke up to the terror of counterparty risk and bail-in confiscation. To the infinite chagrin of the Wall Street spin doctors, even the usually complacent and always obedient mainstream media were reporting what really happened at Silicon Valley Bank and Signature Bank as opposed to the trollop we were being fed about “mismanagement” and “lack of risk controls” and “excessive overconcentration.”

The immortal Richard Russell would always urge his subscribers to “follow the money” whenever an event popped out of the blue and shocked investors like a prominent figure disappearing or a corporate failure (like a bank), and in the case of all of these sudden and inexplicable bank runs, one must ask one’s self “Who benefitted?” in respect of not so much the failures but more so of the massive deposits that fled for the safety of the larger “Too Big to Fail” money-center behemoths that just may or may not have been the source of the rumors that led to the panic that caused the cataclysmic drop in deposits at both failed banks.

Stocks Are Cheap

Then, just as Wall Street was acclimatizing itself to the notion of revised deposit insurance levels and Fed backstopping of the smaller regional banks, along with saunters Credit Suisse, the crown jewel investment bank of the Land of the Watchmaking Gnomes of Zurich, getting monkey-hammered to new lows after the Saudi National Bank told them to “pound sand” after they were asked for a “liquidity injection” (bailout). That set off a whole new round of panic sales within the Eurozone banks and continued to feed and fan the fires of uncertainty across the pond, with even those supposedly stodgy Canadian banks caught in the crossfire.

Now, this is all revisionist mumbo-jumbo because all that really matters is how the events pertaining to the global banking fraternity affect central bank monetary policy — as in — will Powell not only pause but also pivot due to the systemic shocks felt in boardrooms and trading floors the world over last week. Christine Lagarde dismissed it as “elitist lobbying” and still proceeded with a 50 bps. hike in the European bank rate.

I usually watch BNN/Bloomberg during the day for its clarity rather than the one I watched on Friday morning (CNBC), and it took very little time for me to be reminded as to why I quit listening to the never-ending parade of stock market cheerleaders that they trot out in ten-minute segments all pretending to be “debating” the course of interest rates or inflation or sentiment, but they all arrive at one breathless conclusion — that stocks are cheap (!) but not for long.

Was the Silicon Bank Failure in the Same Vein as Chrysler?

The most difficult part of analyzing market corrections like this one is that events like those that transpired in the past two weeks are usually found at or near major turning points in both market direction and central bank policy.

For example, people think that the Great Bull Market that began in the 1980s found its bottom in August 1982, the month when Paul Volcker turned on the proverbial dime and suddenly hacked a half point off the Fed Funds rate, and it is true that stock surged from around Dow 875 to over 1,000 within a few weeks but what people fail to realize is that the real low was actually March of 1980 in a period in which the big worry was The Chrysler Corporation whose disastrous expansion into overseas markets during the

It is my belief that with the inflationary effects of the tight jobs market causing nightmares for the Fed, and since stocks are only down 18% from the January 2022 top, there really is very little justification for abandoning the current tight monetary policy.

The stagflation of the ’70s sent it into the crosshairs of bankruptcy. On May 10, 1980, United States Secretary of the Treasury G. William Miller announced the approval of nearly US$1.5 billion dollars in federal loan guarantees for the nearly bankrupt automaker.

At the time, it was the largest rescue package ever granted by the U.S. government to an American corporation but what it represented was what I call “seminal moments” in stock market history.

The moments usually mark the turn for either the very good or the very bad. Examples of this would include the big rally after JFK was killed in 1963, where, as perverse as it might have been thought, JFK tackling Big Oil and threatening to dismantle the Fed were no longer seen as depressants to stocks, hence the rally.

Converse to that event, a seemingly-bullish punctuation to the DotCom mania happened in January 2000 when media giant Time Warner and internet superstar upstart America Online announced that they would be merging in what eventually became the singular worst business combination in all of history. The surviving entity to this day is only one-seventh the value of the merged entities back in 2000.

The question remains: “Was the Silicon Bank failure a seminal moment in the same vein as Chrysler in 1980?”

The jury is most certainly out because Fed Chairman Powell has been seen wearing 6″ elevator shoes, shaving his head, and trying to acquire a taste for large Montezuma cigars while beating back the inflation beast as did a famous predecessor in the 1980-1982 period.

It is my belief that with the inflationary effects of the tight jobs market causing nightmares for the Fed, and since stocks are only down 18% from the January 2022 top, there really is very little justification for abandoning the current tight monetary policy.

I watched gold plunge 35.3% in 2008 only to advance over 180% to all-time highs after liquidity issues brought about forced selling in the metals just before the central banks bailed out the member banks with a money-printing exercise of orgasmic proportion.

Of course, with all the job cuts on Wall Street and the shrinking bonus pools at all the big investment banks, the wails of protest will be loud and often until the punch bowl gets refilled, and happy days are once again here.

Unless one is a reader of minds or sayer of soothes, it is impossible to determine which was Powell goes next Wednesday so all I will do is look to the tea leaves in the bottom of the cup AND, of course, the charts, which have been a useful sextant with which to navigate the major averages. Last week was actually an “UP” week for stocks despite the volatility and the Friday drubbing.

With all of the negative headlines, it really did appear as though we were in the midst of a seminal moment where traders were buying the regional bank panic thinking that it was a 9/11, GFC, or Covid Crash moment lighting industrial blowtorches into the backsides of those stingy central bankers.

However, all that really occurred was a relief rally after the plunge to SPX 3,808, and while the RSI for the SPX failed to get below 30, MACD looked a tad oversold, which set up the move to the 200-dma at 3,940 above, which reside the 100 and 50-day m.a.’s as well as the big downtrend line off the February top.

Friday’s action negated Thursday’s close above the 200-dma which is now descending and resides at 3,936. I still believe that, at the very best, we can expect a successful retest of the December low at 3,764, but if that fails by month-end, then we are going to new lows below the October lows of 3,491.

Gold and Silver

In last week’s missive, I wrote: “I see a test of the US$1,900 range by the end of the month, but if, in fact, I see further turmoil in the regional banks that spreads to the money-center banks and abroad, gold could catch a “fear trade” bid as traders move rapidly for the safety of non-paper assets.”

That “fear trade” bid came in like an Indian monsoon last week, with gold up over US$150/ounce, silver over US$1.20, and the HUI 29 points higher. With crude oil and copper down, color commentary by the pundits suggested that it was the slowing economy that was spooking the oil and copper pits, but from my vantage point, you would have expected the U.S. dollar (USD) to end the week on the lows, which it did not.

Whenever I see the performance triumvirate of gold chasing silver, silver chasing the PM equities (HUI), and PM equities decoupling from their anchorage to the USD and the SPX, I feel justified in adding to holdings. That is precisely what we got last week, and that silver put in a +4.88% move versus a +3.68% move for gold, but the stud of the day was the HUI which posted a +5.42% pop which, as I have been saying, for weeks now, will have a positive effect on our basket of junior miners.

My largest holding and top pick for the past few years, Getchell Gold Corp. (GTCH:CSE; GGLDF:OTCQB) added 12.28% Friday, a welcome relief for those of us that cannot begin to explain how that share price could trade down to US$9.20 per ounce of in-ground gold in mining-friendly Nevada as it did last week.

Their 2,059,900-ounce Fondaway Canyon (100%-owned) deposit is wide open to depth and along strike and is considered to have definite Tier One potential.

A couple of weeks ago, I suggested that Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) in the low-mid US$40’s might be an interesting contrarian play due to the universal loathing being shown toward a group of companies with near-pristine balance sheets and strong income statements.

In the past two weeks, the number one input cost for miners — energy — has come under huge downside pressure falling 17.5% while their product is up 8.4%. That represents an expanding profit margin for the group, and here we are two weeks later, with AEM touching US$51.22 on Friday, and that is only after miners finally woke up on Thursday.

Another company that has caught my eye (thanks to my colleague and real technical analyst and market historian David Chapman) is Moneta Gold Inc. (MEAUF:OTCMKTS), formerly Moneta Porcupine Mines Inc. (ME:TSX), one of the first stocks I ever bought back in 1977

I used to follow it, but a bloated share structure and unremarkable asset mix kept me at a distance — until last week — when Chappie suggested I have a look. The first thing I asked was about the share structure, and to my surprise, I found that they went through a consolidation a while ago such that today there are a manageable 102,416,437 issued and a market cap of only US$102 million.

Digging deeper, I had forgotten that they always had a big land package in the heart of the Destour-Porcupine-Fault-Zone (“DPFZ”), a mineralized corridor within the legendary Abitibi-Greenstone Belt of northern Ontario and Quebec and have, in recent years significantly advanced the Tower Gold Project which includes a 17-km. strip of the DPFZ.

  • The current mineral resource estimate of 4.46 million ounces (“Moz”) indicated contained gold within 150.6 million tonnes (“Mt”) at a grade of 0.92 grams per tonne Au (“g/t”) and 8.29 Moz inferred contained ounces within 235.6 Mt at a grade of 1.09 g/t announced on September 7, 2022.

Adding 4.46 million ounces of indicated plus 8.28 million ounces inferred and you arrive at a global resource of 12.75 million ounces. From the Friday evening close of US$0.90, the company sports a market cap of US$91.7 million. Dividing the current market cap by the global resource of 12.75 million ounces, I arrive at a market cap per ounce of only US$7.19.

The company completed a Preliminary Economic Assessment in 2022 and arrived at the following:

  • The September 7, 2022, Preliminary Economic Assessment (“PEA”) demonstrated robust economics with C$1,459 million pre-tax Net Present Value of 5% (“NPV”), CA$1,066 million after-tax NPV5%, and a 31.7% after-tax Internal Rate of Return (“IRR”) at US$1,600/oz gold, and an exchange rate of US$0.78.
  • The PEA also demonstrated a CA$1,932 million cumulative after-tax cash flow, a mine life of 24 years, with average annual gold production of 261,014 oz in years one to 11 (192,666 oz for Life of Mine (“LOM”)) for 4,581,000 ounces total gold production LOM. Cash costs are estimated at US$910 per ounce, with all-in-sustaining costs (“AISC”) of US$1,073 per ounce of gold.

A Pre-feasibility Study is underway and expected to be completed next year which means ME qualifies as an advanced developer and a true proxy for rising gold prices. I was shocked to see the value-per-ounce come in at nearly US$7/ounce. I knew that gold miners were being thrown under buses these days as “value traps,” but between Getchell Gold at US$9.27/ounce last week and ME’s number, it really is astounding to see how universally detested the miners have become. My premise for owning Moneta Gold is buttressed by its location in the heart of a mining camp that has already produced over 85 million ounces since discoveries were first made in the 1800s.

Moneta is a sure-fire M&A candidate and is being added to the GGM Advisory portfolio as of Monday’s opening.

I Want To See Silver Outperform Gold

With the miners all catching a major league bid last week led by gold space, silver also caught fire.

I want to see silver outperform gold right through to month’s end. From the chart of silver above, it is clear just how poorly silver has been relative to gold (and everything else, for that matter) since the beginning of 2021.

I excluded 2020 because of the myriad of stimulus-driven deformities that occurred, leaving us only the recovery period. It is imperative for the health of the entire metals complex that silver assumes “big dog” status and takes over the leadership of the rally.

The problem with making forecasts regarding silver is that I can get all of the bullish inputs to the price behavior correct (as I did back in 2020) and yet recoil in amazement (and horror) that the all-important price variable went south instead of north despite rampaging consumer prices, geopolitical turmoil, and central bank profligacy.

The Electrification Movement 

As for the Electrification Movement, there is one very important truism that reigns supreme within the context of even the noblest of undertakings. When stock markets go into panic mode, a carbon-free world takes second place in the preservation of capital. With the banking crisis going global, the battery metals all took it on the chin last week, with copper below US$4/lb. and lithium is now in full correction mode.

Poster child Patriot Battery Metals Inc. (PMET:CA) is still ahead 76.67% YTD while down 34.08% from the top seen in early February.

No changes to my thoughts on Allied Copper Corp. (CPR:TSX.V; CPRRF:OTCQB) / Volt Lithium (CPR:TSXV / CPRRF:US) (which I own), where I await the results of large-scale testing of their DLE Process (“Direct Lithium Extraction”) at Rainbow Lake Alberta. These results, if successful, will be a game-changing thunderbolt for CPR shareholders once markets settle down.

Volatility in US Treasury Market

Speaking of markets “settling down,” this weekend has been a constant bombardment of financial market grave-dancing because there are a great many of those very smart (and Street savvy) people I follow that have issued “crash alerts.” I have issued two via my Email Alert service urging everybody to “get defensive” by way of eliminating margin and raising cash.

Now, markets may not crash at all, but since the conditions out there are so bizarre, with massive volatility in the U.S. treasury market, there is something very untoward happening. Treasury markets are supposed to be safe havens where investors go to hide in relative calm as the equity market tempest passes. Instead, the yield on the U.S. two-year treasury, sitting at 5.07% on March 7th, closed the week at 3.845%, which represents a 25% crash in the 2-year yield. That is unheard of.

In ancient Greek mythology, it was written in The Labours of Heracles that he destroyed the Lernean Hydra, a multi-headed reptilian beast, and to do so, Heracles enlisted the aid of his nephew Iolaus.

As Heracles severed each mortal head, Iolaus was set to the task of cauterizing the fresh wounds so that no new heads would emerge. This story of Heracles evokes images of today’s financial landscape where each time the regulators solve issues of a systemic nature, another one pops up, just like the Hydra’s heads, only in our story, there is no regulator, politician or Keynesian hero able to “cauterize the fresh wounds.”

There are a great many exciting and potentially-enriching stories out there, but the only one that matters at times like these are the ones that have happy endings without us losing all of our wealth because we failed to heed the storm clouds and plunging barometer.

Absent a coordinated rescue mission by central banks the world over, there are few reasons to be bullish on anything out there save gold and silver but need I remind you how those two “ultimate safe havens” acted during the 2008 G.F.C. and the more recent Covid Crash of March 2020.

They outperformed most other asset classes, but outperformance does not pay your electricity bill or college tuition if the price you paid is higher than where it was sold. “Get defensive” means one has cash that they are able to deploy in favor of depressed prices that occur only when liquidity needs supersede valuation metrics.

I watched gold plunge 35.3% in 2008 only to advance over 180% to all-time highs after liquidity issues brought about forced selling in the metals just before the central banks bailed out the member banks with a money-printing exercise of orgasmic proportion.

Carpe diem? No. Caveat emptor? Absolutely.

 

Michael Ballanger Disclaimer:

This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

Disclosures:

1) Michael J. Ballanger: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Getchell Gold Corp., Patriot Battery Metals Inc., and Allied Copper Corp. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: My company, Bonaventure Explorations Ltd., has a consulting relationship with: None.

2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. As of the date of this article, an affiliate of Streetwise Reports has a consulting relationship with: None. Please click here for more information.

3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.

4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Agnico Eagle Mines Ltd. and Allied Copper Corp., companies mentioned in this article.

Economics & Fundamentals Opinions
21 Mar

Investors prepare for next rally ahead of central bank meetings

By George Prior

Investors are ready to build their investment portfolios with new money amid a growing consensus that looser monetary policies are coming which will boost financial markets, says the CEO of one of the world’s largest independent financial advisory and asset management organisations.

This assessment from Nigel Green of deVere Group comes ahead of critical policy meetings this week at the US Federal Reserve and Bank of England.

It also follows the Fed and five other major central banks announcing, in a coordinated joint statement, fresh measures to improve global liquidity. The central banks said the move served as an “important backstop” to ease strains in global funding markets.

He comments: “Global markets remain jittery from the turmoil caused by the fallout of the crises hitting Silicon Valley Bank, Signature Bank, Credit Suisse and First Republic Bank.

“There are fears of runs on other banks as other lenders could find themselves in trouble after rises in interest rates left some harbouring major losses.”

The deVere CEO continues: “The coordinated action being taken by the US Federal Reserve, the Bank of England, Bank of Japan, Bank of Canada, the European Central Bank and Swiss National Bank launched on Monday to keep credit flowing in the serious issues affecting the banking sector, show that they are willing to do whatever it takes to avert a crash.

“Investors are taking this as a sign that central banks will now ease off interest rate hikes.

“Looser monetary policies will trigger a surge in financial markets.

“Not wanting to miss out on the next rally, clients are now telling our consultants around the world that they want to build-up their investment portfolios with new money.”

Looser monetary policy increases liquidity in the markets, stimulates economic activity, and boosts investor confidence, all of which can contribute to higher stock prices.

The next Federal Open Market Committee (FOMC) meeting is scheduled for March 21 and 22. The US Fed rate hike decision will be announced on March 22 at 2 pm (ET) followed by a press conference.

Meanwhile, the Bank of England will meet on Thursday and hold a press conference at noon in London.

“Central banks have the unenviable task of trying to cool stubbornly high inflation and restore financial stability,” says Nigel Green.

He concludes: “It seems that investors are gripped by the Fear Of Missing Out. They’re looking past interest rate hikes and assuming that the chaos in the banking sector will unleash looser monetary policies from central banks, which will be fuel for the markets.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

Economics & Fundamentals Financial News
21 Mar

Investors are evaluating the prospects of the US Federal Reserve’s interest rate decision

By JustMarkets

At the close of the stock market yesterday, the Dow Jones Index (US30) gained 1.20%, and the S&P 500 Index (US500) increased by 0.89%. The NASDAQ Technology Index (US100) added 0.32% yesterday. The US Federal Reserve said late last week that it would work with other major central banks to provide liquidity to the global banking sector. Certainly, this has brought some optimism back to the stock market. But that could easily dissipate if the US Federal Reserve raises interest rates on Wednesday and hints at further policy tightening.

Former Goldman Sachs chief executive Lloyd Blankfein said the Federal Reserve might take a pause in raising interest rates this week as the unfolding banking crisis tightens lending standards in the economy. Blankfein also warned that without intervention to protect deposits at small and regional banks, consumers could only rely on large banks that have high capital and liquidity standards. This, he said, could lead to consolidation in the financial sector, which would negatively impact the nation’s large and growing economy. Before the SVB collapse and the resulting policy implications, the Fed was willing to raise rates by as much as 50 basis points as price pressures in the US economy were deemed sustainable. Given the current market volatility, some Fed observers expect a quarter-point hike, while others predict a pause.

Shares of the New York Community Bancorp jumped by more than 31% after his subsidiary Flagstar Bank agreed to buy most of Signature Bank for $2.7 billion. Concerns about the banks’ liquidity crisis subsided somewhat Monday when Swiss investment bank UBS said it would buy Credit Suisse, and JPMorgan (JPM) appeared to have made progress in rescuing First Republic Bank (FRC) following last week’s federal takeover of regional banks Silicon Valley and Signature.

European stock indexes rose on Monday amid improving sentiment in the banking sector after UBS agreed to buy struggling rival Credit Suisse. German DAX (DE30) gained 1.12%, French CAC 40 (FR40) jumped by 1.27%, Spanish IBEX 35 (ES35) gained 1.31%, and British FTSE 100 (UK100) closed yesterday with a 0.93% gain.

To further improve financial stability in Europe, European Central Bank President Christine Lagarde said that the central bank is “ready to respond as necessary” to maintain the stability of the euro area.

Gold prices have finally reached the $2,000 per ounce mark. Falling dollar index and falling government bond yields amid the banking crisis are fueling gold’s rise. But analysts are confident that traders should expect a correction wave in the coming days because prices are heavily overbought now.

Crude markets tried to rebound yesterday after regulatory measures to shore up liquidity and consolidate weak players in the banking sector helped ease some fears of an impending crisis. But that was largely offset by uncertainty ahead of this week’s key Fed meeting. Asian markets mostly fell Monday. Japan’s Nikkei 225 (JP225) decreased by 1.42%, China’s FTSE China A50 (CHA50) lost 0.41% for the day, Hong Kong’s Hang Seng (HK50) lost 2.65% for the day, India’s NIFTY 50 (IND50) decreased by 0.65%, and Australia’s S&P/ASX 200 (AU200) was down by 1.38%.

On Monday, the Bank of Japan appointed Seiichi Shimizu, whose market and technical expertise in the bank’s Yield Curve Control (YCC) policy has earned him the nickname “Mr. YCC. During his tenure as head of the financial market division, the 57-year-old banker helped put together a package of steps to mitigate the side effects of the YCC in 2021, such as phasing out large purchases of risky assets. Shinichi Uchida was elected deputy governor. The new governor, Kazuo Ueda, will join the Bank of Japan when the term of incumbent Haruhiko Kuroda expires next month. Many analysts expect the Bank of Japan to change or cancel the YCC during Ueda’s five years in office, as the bank’s huge bond purchases to protect the yield cap have been criticized for distorting the shape of the yield curve and depleting bond market liquidity.

S&P 500 (F) (US500) 3,951.57 +34.93 (+0.89%)

Dow Jones (US30)32,244.58 +382.60 (+1.20%)

DAX (DE40) 14,933.38 +165.18 (+1.12%)

FTSE 100 (UK100) 7,403.85 +68.45 (+0.93%)

USD Index 103.30 −0.40 (−0.39%)

Important events for today:
  • – Australia RBA Meeting Minutes at 02:30 (GMT+2);
  • – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
  • – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
  • – Canada Consumer Price Index (m/m) at 14:30 (GMT+2);
  • – Eurozone ECB President Lagarde Speaks at 14:30 (GMT+2);
  • – US Existing Home Sales (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.

Economics & Fundamentals Financial News
21 Mar

Markets Stabilise As Investors Digest Credit Suisse Takeover

By ForexTime

Asian markets rose on Tuesday after Wall Street staged a rebound overnight as the historic takeover of Credit Suisse Group AG soothed concerns over the global banking sector.

Switzerland’s largest bank UBS Group AS has agreed to purchase Credit Suisse for $3.2 billion in what’s being labelled a “shotgun marriage”. But it is aimed at containing the panic and jitters currently around the financial system. Although the latest developments have lifted sentiment, the overall mood remains fragile with investors likely to remain guarded ahead of the Fed meeting tomorrow. In the currency space, the dollar steadied during early trade and could end a three-day losing streak if bulls fight back. In the previous session, oil prices rebounded after tumbling to their lowest levels since 2021 while gold punched above$2000 for the first time since March 2022 before ending the session 0.5% lower.

We expect financial markets to remain volatile and highly sensitive to any fresh news concerning the global banking sector. With fears over the crisis easing, we could see a modest return in risk appetite, lending support to global stocks. Shifting our focus elsewhere, this will be a big week for markets with the US Federal Reserve (Fed), Bank of England (BoE), and Swiss National Bank (SNB) policy meetings in focus. It will be interesting to see what the SNB has to say about the Credit Suisse developments, especially after the historic takeover.

Fed meeting in focus

The upcoming Fed meeting could be tough as the central bank decides whether to focus on solid macroeconomic data or the stability of the financial system.

Markets expect the Federal Reserve to raise interest rates by 25 basis points this month, with the chances of this decision currently priced at 74%, according to Fed funds futures. Key for markets will be what the central bank has to say about the recent developments concerning the SVB collapse and Credit Suisse drama, especially after the UBS takeover.

If the Federal Reserve surprises markets by leaving rates unchanged, this could signal the end of the rate hike cycle with the next move being a cut in rates. Such a development is likely to deal a heavy blow to the dollar along with Treasury yields. Markets might also take it as a sign that the Fed fears contagion risks in markets via the banking sector, and this would likely see a sharp sell-off in stock markets. Whatever the outcome of the Fed meeting, it may influence the dollar’s outlook for the rest of March.

Taking a quick look at the Dollar Index (DXY), it remains under pressure on the daily charts. The recent close below 103.00 may signal further downside with 102.30 acting as the next key point of interest. Should prices close back above 103.00, this may invite a move towards 104.00.

Currency spotlight: GBPUSD

The Bank of England policy meeting on Thursday could be tense given the latest turmoil in financial markets.

We could witness a battle between doves and hawks as both charge into the meeting well-equipped and ready to attack. On one side of the equation, stalling wage growth has fueled speculation about the MPC’s tightening cycle coming to an end. However, UK inflation is still well above the 2% target with the latest figures on Wednesday forecast to show prices cooling to 9.9% in February. If the BoE decides to leave rates unchanged this month, this could weigh heavily on the pound. Talking technicals, the GBPUSD is bullish on the daily charts. The daily close above 1.2250 could signal further upside. However, where the currency pair concludes this week will be heavily influenced by the Fed and BoE meetings.

Commodity spotlight – Gold

Gold kicked off Tuesday’s session on a mellow note, a complete contrast from the previous day.

On Monday, the precious metal punched above $2000 for the first time since March 2022 as concerns over the banking system boosted the appetite for safe-haven assets. Given how fears of a full-blown crisis later eased following the historic takeover of Credit Suisse, this blunted appetite for gold. Nevertheless, the precious metal is set to glow amid the fragile sentiment with expectations around a less aggressive Federal Reserve limiting downside losses. Looking at the technical picture, gold could experience a technical pullback towards $1955 before bulls take further action. Should $1955 prove to be unreliable support, prices may decline towards $1935, $1915, and $1900, respectively.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
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