March was a mess for traders as banking turmoil broke the markets. Lots of volatility and sudden big moves kept traders on their toes. The correlation between assets weakened considerably, but the biggest divergence may have been between central bank members and market expectations.
Moving into April, banking worries could ease up a bit, unless, of course, as the Queen says, “another one bites the dust” first. Banks, inflation, and central banks will be in focus this month.
Macro View
Banking turmoil started with Silicon Valley Bank’s announcement about the need for more liquidity and considering options, including stock sales. After the initial news, worries turned to panic, which led to the bank’s failure. SVB is not the first to fail. Silvergate, a small bank that heavily relied on crypto, was the first to go. The markets accepted that easily because of its size and business type. But SVB is a middle-sized bank, and its business is mostly with tech start-ups. Because of that, almost all of the deposits were uninsured.
After SVB, Credit Suisse came into focus. Credit Suisse has had some troubles in the past and was on the road to recovery with extra investment from the Saudi National Bank. But it was the Saudi National Bank’s chair who first started the domino effect with his speech. When asked if Saudi National Bank would be willing to provide additional funds to Credit Suisse through equity injections, the chair responded, “the answer is absolutely not.” After the comment, Credit Suisse’s CDS skyrocketed and put the bank in a very difficult position. The bank was able to borrow $54 billion from SNB, but it was not enough. After hard negotiations, UBS took over the bank with many guarantees. SNB agreed to provide up to $100 billion liquidity, while the Swiss government would cover $9 billion of potential costs from the value loss of Credit Suisse’s assets. $16 billion worth of AT1 bonds were written off, causing another turmoil in the AT1 bond market.
In less than a month, the markets faced a crisis that few expected. Deposits fell while money moved to money market funds, safe havens, and perhaps stock markets. The pressure on deposits is still ongoing. According to reports, US banks have $620 billion of unrealized bond losses. Banks are running to the Fed’s backstop discount window and the newly formed bank funding program. The total liquidity used in the system reached $480 billion, although it slowed down last week, even just a bit. These programs will show the pressure on banks in the coming weeks.
Underlying inflation is still strong despite the actual CPI starting to fall. UK and US core CPI are nearly flat with little sign of slowing since the spring of 2022. The EU, on the other hand, is catching up to them but is still on an uptrend. The ECB’s vice-chair, Guindos, said that they believe the headline inflation will decline considerably, while underlying inflation dynamics will remain strong. As long as core inflation stays hot, central banks will probably do too little to cut rates. In the coming months, core CPI and PCE data will be extra important for the markets.
The services sector continues to be one of the key drivers of inflation. Most of the developed economies have a services PMI higher than 50, showing an increase in activity for months. The US ISM services have been over 50 since the middle of 2020, a massive run. Because of that, the job market stays tight, even with all the inflation and rate hikes. The Chinese economy is on the fast track to recovery after a relatively successful reopening. The EU’s services PMI has been rising for the last four months and has now reached 55.6, showing strong activity increase. As for the UK, despite all the recession expectations, the economy is able to stay strong, especially the services sector.
FED rate expectations took a nosedive after the banking turmoil. Now markets expect almost 2 full rate cuts this year. It even reached 4 cuts in the midst of the turmoil but returned to more rational levels after the conditions became less volatile. Despite that, FED “just can’t see rate cuts this year,” according to Chair Powell. On the hike side, there is still a possible rate hike chance, but after that, members expect rates to stay high until the year-end. Whether markets are right or the FED, the end of this divergence could lead to sharp corrections in many asset prices.
On the ECB’s side, markets expect two more 25-point hikes and no cuts until the first meeting of 2024. The ECB raised the rates by 50 points in the middle of the banking turmoil and respected their earlier promise. Dove members urge slowing down, while hawks point to strong underlying inflation and want further hikes and even faster QT starting in the summer, according to Bundesbank Chair Nagel. Schnabel, one of the most respected members of the ECB, said that she pushed for “more hikes in the future” at the ECB statement in the last meeting. Markets seem to be in agreement with her, but how many hikes are required and how will this affect the banks? These are hard questions.
According to Lagarde, inflation-fighting tools and bank-helping tools are different. The ECB could go further with hikes and help banks with liquidity as well. So far, Lagarde, Guindos, and many members are in agreement that European banks are resilient and have enough liquidity, but if needed, the ECB has tools to relieve the stress. Perhaps a similar tool to the Fed’s bank funding program? We will see. But lenders have to pay nearly 500 billion euros from TLTROs that they borrowed during the pandemic at the end of June. It will tighten and test the liquidity in the markets.
The UK economy continues to show resilience despite a sharp recession expectations. The 4th quarter GDP has been revised up to 0.1% and PMIs are high. The only problem is that inflation is running hot. The UK’s CPI did not fall as expected, unlike the US and Eurozone, and this has led to rate path expectations staying relatively high.
As for Japan, inflation signals are higher than expected, but there are some small signs of a slowdown in the jobs market. Last Friday, the jobless rate increased to 2.6% from 2.4%, while Tokyo CPI and core CPI slowed by 0.1%, but stayed above expectations. The Bank of Japan is preparing to meet with its new chair at the helm for the first time. There are no big expectations for the first meeting, but the markets are expecting a shift in policy this year, and maybe even one rate hike.
Central Bank Meeting Calendar
Australia RBA Meeting 04.04.2023
New Zealand RBNZ Meeting 05.04.2023
USA FOMC Minutes 12.04.2023
Canada BOC Meeting 12.04.2023
Japan BOJ Meeting 28.04.2023
Technical View
The US 10-year yield fell sharply after the banking turmoil. The expectation of the Fed cutting rates and perhaps some of the money preferring relatively high yields might have caused the sharp fall. The 3.15-3.30 zone is the support for now. A possible break of the support could lead to below 3%. But the support is holding, at least for now.
Brent has been moving sideways for a few months, between 77.75 and 90. But with recession expectations surging sharply, it took a hit as well and fell as much as to 70. However, after the initial shock, the price is now above 77.75 again. Around the 82-84 zone, there is strong resistance with the big downtrend line starting in March 2022 and the 100-day moving average, which has been putting down pressure since July 2022 and has rejected advances more than 8 times. If Brent is to go higher, there is a need for a breakout over these resistances, and then 90 will come into play. For down moves, holding below 77.75 might signal more weakness ahead.
Precious metals enjoyed the banking turmoil and falling central bank rate expectations. Silver gained more than 16% after weak performances for the first two months of 2023. Gold surged strongly but turned flat after the 20th of March, perhaps because of nearing key resistances. Palladium and platinum also enjoyed a good month but were much weaker relative to gold and silver.
The gold/silver ratio turned in favor of silver in March, especially after the banking turmoil. Silver tends to move faster when metals are surging, which is signaling that gold might stay strong if the current trend continues. Also, silver had some catching up to do.
Gold ETFs had their first significant inflows since early 2022, while deposits ran from banks. Is this a trend change opportunity for gold? Perhaps it is too early to tell, but gold is clearly enjoying heightened risks in the markets.
The 10-year real yield fell in March, but not enough to explain gold’s big jump. Gold’s move can be explained more by running deposits and increasing demand for safe havens. But according to models based on yields, it is still overvalued. However, this won’t stop gold from advancing more if risks continue to stay high. And with the debt limit approaching fast, this could also help gold. But if risks subside, gold prices could take a big hit very fast because of being overvalued.
Gold bounced perfectly from the key support zone of 1770-1805 and then reached the 2000-2017 resistance zone with the help of rising risks. Now the price increase has slowed down, and gold is looking for direction again. If the 2000-2017 zone breaks, the upward momentum can carry into April. As for the downside moves, 1937 is the support to look for, and a break to the downside could open the way for 1900 again.
Silver made an incredible run in March and pushed lots of resistances out of the way. But it is closing in on a key one. Since its 2020 top, silver has been in a low-slope downtrend. The upper line of the trendline is near 25, and the Fibonacci 76.4% retracement level is at 24.73. Because of that, the 24.50-25 zone could create massive resistance, especially after the sharp run. As long as it holds, up moves can create selling opportunities. On the other hand, silver demand is expected to pick up even more in 2023, and so investors didn’t mind the possible breakout opportunity as well.
The dollar index took a hit because of the banking news flow and all the extra liquidity injected into the markets to compensate for the deposit outflows. Despite that, the 100-week exponential moving average is still holding as support. The 101-101.7 zone is creating strong support. If it breaks to the downside, the downward pressure might continue. But as long as it holds, another attempt to the Fibonacci 38.2% level might start.
The stock markets had a wonderful month despite the banking turmoil and increased recession risks. The main reason was falling rate expectations. The Dow Jones index was the weakest in the US as manufacturing is still way behind the services sector. The S&P 500 did solid in March despite banking stocks crashing. The DAX also enjoyed a good month but Credit Suisse news and Deutsche fears limited the up moves a bit. The star of the month was Nasdaq with a huge divergence from them all. The main reason was the AI craze. ChatGPT increased the adoption and investment in AI throughout the world. With NVIDIA’s presentations and dip buyers re-entering the markets, tech stock investors enjoyed big returns.
The S&P 500 has formed the perfect bottom, and all that is left is a breakout. The downtrend has been broken, and the index has pulled back twice and tested the trend, but it found support at 3800 the second time. Now, it is closing in on the 4170-4200 resistance zone. The Nasdaq has already made a similar breakout. If the S&P 500 follows its example, it could be the foundation of a long-term uptrend. However, there is a lot of uncertainty at the moment, and things could easily change. 3800 is the key support to follow if things go sideways.
FX crosses have felt the impact of the banking turmoil. Throughout the month, the forex markets experienced sharp and sudden moves many times. The correlation between many instruments has lessened. EURUSD and GBPUSD rose around 2%. ECB and BOE rate path expectations were less affected relative to FED’s, making them more bullish. The Yen gained value because of the safe-haven effect and policy normalization expectations. USDCHF fell despite SNB’s rate hike. The Credit Suisse news flow was the main reason. Another weak performance came from AUDUSD. Markets expect the RBA to end its rate hikes and begin cuts as soon as this year, which could continue to affect AUD negatively.
EURUSD is in an uptrend channel and got a boost from the lower line of the channel. 1.0930 is the immediate resistance that is being heavily tested. A breakout could lead the price to above 1.10 and even above 1.13, depending on the news flow and incoming data. On the other hand, a banking failure or even a hint of it from the Eurozone could cause a sharp fall. Investors should be extra careful with news, at least for now.
The Germany-US real yield spread continues to heavily dictate the direction of the EURUSD. Our model suggests that the EURUSD could rise as much as 1.15 in the coming months if the current situation does not change too much. The correlation between the two has even become steadier since November.
The Italy-Germany rate spread does not seem to be causing any concerns for the EURUSD. Although rising rates can sometimes cause divergences between funding costs of different countries in the Eurozone, investors should continue to watch for any signs of stress in the yield spread. As long as it remains low, it is positive for the EURUSD.
GBPUSD has been moving sideways between the range of 1.18 and 1.25 since November. As long as these levels hold, the flat move could continue. However, the GBPUSD is also closing in on the downtrend line. Above 1.25, the Fibonacci 61.8% level of 1.2759, which is close to the trend line, could be tested along with a bull trap if 1.25 is passed. To see steady up moves, a hold above 1.2760 could be key. As for the downside, the 50-day moving average could be followed as a pivot point between 1.18 and 1.25.
USDJPY has shown some weakness below the 100-day moving average. If Japan’s inflation stays hotter than expected, downward pressures could intensify. The key resistances to follow this month are 133.06, 135.47, and 136.67. As for the downside, the March dip at 130 is the first key support. Below it, 127.23 and 122.63 could create strong support levels.
