Summary: Banking sector concerns continued to roil markets as the SVB fallout still remains a big unknown despite measures from US authorities to stem contagion. Flight to safety accelerated further with 2-year Treasury yields slumping by a massive 60bps, and Fed rate expectations continued to shift lower with terminal rate expectations now down to 4.8% from 5.7% last week. Dollar was broadly sold and gold and silver were in favor on yield drop. US CPI still a key focus ahead but a softer print can prompt a further shift lower in the expectations of the Fed tightening path.
After the sweeping failure of regional lenders, including Silicon Valley Bank, and ahead of the all-important US inflation read, tech stocks edged cautiously ahead, while bond yields fell - as SVB’s collapse severely complicated the Fed's rate path. Meanwhile, the NY Fed probability of a recession index, climbed to its highest level since the GFC, while the Volatility index hit its highest level since October last year. As such we remain cautious. The swaps market is now showing a less than 1-in-2 chance probability the FOMC can continue to hike rates, while also showing a probability of several rate cuts this year. So, the two-year treasury (bond) yield plunged 61 bps to below 4%, the biggest one-day slump in decades, while the 10-year yield dropped 16 bps. While the US dollar plummeted, sending the kiwi, yen and Aussie all up by 1.2% or more.
The Federal Reserve will launch an internal probe to the supervision of Silicon Valley Bank after its collapse sparked criticism by the central bank oversight, with Michael Barr leading the review, which is said to be publicly released by May 1. Not only the Fed is concerned, but so too is Washington and investors alike. The KBW Bank Index shed 12% on Monday, continuing last week’s rout that saw the index slide 16%- with the index collectively notcing its biggest monthly pull back since COVID19. First Republic Bank shares tanked 62% on Monday, with other regional banks such as Western Alliance Bancorp falling 47%, and California-based PacWest Bancorp down 21% - as investors fret about the strength of liquidity in the lending market. Larger companies also are not immune to the sell off- Charles Schwab shares slid 12% with traders also de-risking and even perhaps shorting some financial institutions. As mentioned on Monday’s Podcast - we think the rout of several lenders in Silicon Valley could have a profound ripple effect on the innovation eco system – and future lending meaning access to liquidity in the VC and cryptocurrency market could be limited – and this could also impact the private equity market. All this reinforces Saxo long held belief that the physical world will continue to outperform the intangibles (the technology sector). This view was reinforced in our Quarterly Outlook.
On the back of U.S. regional bank turmoil, investors quickly repriced the front end of the Treasury curve and removed additional future rate hikes in this tightening cycle. Investors flocked to 2-year Treasuries in safe-haven bids and traders closed out curve-flattening positions. Yields on the 2-year plunged 61bps to 3.98% while the 10-year yields fell “only” 13bps to close at 3.57%. The 2-10-year curve steepened to -46bps, after hitting as inverted as -110bps last week.
Hong Kong and Chinese stocks rallied as U.S. regulators rolled out plans to prevent the woes in Silicon Valley Bank and Signature Bank to turn into systemic risks. Hang Seng Index advanced 2% and CSI300 climbed 1%. China’s Two Sessions concluded this morning. President Xi secured a third term and his ally Li Qiang took the position of Premier, both being widely expected. Premier Li Qiang’s remarks at the press conference had a pro-growth and market-friendly tone.
Energy, telco, China consumption, and China internet stocks drove the advance of the Hang Seng Index. Hang Seng TECH Index gained 2.9%. Bilibili (09626:xhkg) jumped 10.7% following the video-sharing platform being included in the Stock Connect. In A-shares, SOE telcos outperformed. Belt-and-Road-Initiative-related stocks were well bid.
After not only the dovish commentary from the RBA but the recent demise of several large VC and cryptocurrency lending banks in the US, now we are seeing that the RBA’s interest rate hiking cycle could be over. That’s according to the swaps market, which reflects that there is just a 50% chance for an increase in the RBA’s cash rate for the rest of this year.
The USD continued to slide on Monday as Fed expectations were revised further lower (read below) but some floor was being found in early Asian trading. AUDUSD touched highs of 0.6717 before reversing to 0.6650, while NZDUSD surged to 0.6250+ before heading back towards the 0.62 handle. GBPUSD could not move above 1.22 and focus turns to labor market data in the UK today before the budget announcement tomorrow. EURUSD touched 1.0750 with a 50bps rate hike still on the table this week. Safe haven JPY and CHF continued to outperform as bank risks reign, with USDJPY staying below 134 and USDCHF testing support at 0.91.
Oil prices closed lower by 2.5% on Monday as banking sector concerns continued to spell caution on risk assets. However, expectations of a less aggressive Fed monetary policy helped crude oil to recover from its lows, and focus now turns ahead to the US CPI data due today. WTI futures still trading below $75/barrel while Brent is at $80. OPEC is scheduled to issue its monthly market report later Tuesday, while the International Energy Agency follows with its release on Wednesday, providing on snapshot on the outlook for supply and demand, but focus is unlikely to be back on fundamentals until market concerns ease.
Gold broke above the $1900 barrier as flight to safety continued despite the efforts of US regulators to reduce the risk of contagion from the SVB collapse. The massive drop in 2-year Treasury yields of the order of 60bps as well as market pricing in as many as 4 rate cuts this year have seen the dollar come off considerably from its highs and brought the precious metals back in focus. Additional demand for Gold from momentum traders looking for a fresh upside attempt, could bring Gold towards the January high around $1950. Silver was up over 6% on Monday as well breaking the $21.70 resistance which will be followed by $22 and $22.27.
Bonds continued to soar as markets digested the measures of the US regulators to stem contagion from the collapse of SVB. But that continued to complicate the path of monetary policy with the Fed having broken something. As markets continued to re-assess the path of monetary policy from here, 2-year Treasury yields plunged 61bps to below 4%, the biggest one-day slump in decades, while 10-years dropped 16bps. The CME FedWatch tool now shows a 35% chance of no move from the Fed next week, and 65% probability of a 25bps rate hike. Fed Funds futures are now pricing in a terminal rate of 4.8% as early as May (down from 5.7% in July earlier) and as much as 100bps of rate cuts this year (compared to one 25bps rate cut expected last week).
US inflation has been the talk of town for several months now, although the focus has lately turned to financial contagion risks that may stop the Fed from switching back to a higher rate hike path trajectory. In fact, several banks are now calling for a pause next week, with one also expecting a rate cut and an end to quantitative tightening. Still, February CPI – due to be released on Tuesday – will be a big test after last month’s print reversed the disinflation narrative in goods inflation, and continued to point at sticky services inflation.
Headline consumer prices are expected to rise +0.4% MoM in February, cooling slightly vs the +0.5% in January, with the annual rate seen easing to 6.0% YoY from 6.4% previously. Core CPI is expected to rise +0.4% MoM in February, matching the January pace, though the annual rate is likely to fall to 5.5% YoY from 5.6% in January. Overall message is likely to remain that inflation remains stubbornly high, especially after tough weather conditions in California, but the risk of a 50bps rate hike from the Fed in March remains low as the central bank becomes wary of “something breaking”.
The US, Australia and the UK unveiled further plans for a new fleet of nuclear-powered submarines when the country heads met in the US on Monday. There will be an initial budget of about A$9 billion through to June 2027, with the tri nations deepening their Aukus Defense partnership that formed 18 months ago, to counter China in the Pacific. The market awaits further detail with much of the discussion remaining confidential. To read more on what to expect, click our article here.
The iron ore (SCOA) price has extended its rebound - with the steel ingredient's price is up 2.7% so far this week, after rising 2.7% last week. All in all, the iron ore is now trading 8% higher year to date, and above the $132 for the first time since April last year. We’ve been speaking a lot about how iron ore buying usually picks up around this time of year, with Chinese steel mills getting ready for peak construction season - which runs from March through to June. Fresh data released on Friday showed by both steel stockpiles and iron ore inventories fell last week, which implies there is a need to top of up stockpiles. We think buying of iron ore will likely continue in 2023, as the re-opening of China’s economy pick up, all while iron ore supply remains short. And this is underpinning price strength, despite some in Beijing accusing iron ore market participant's of price manipulation.
Australian business and consumer confidence, numbers released today – show consumer confidence is somewhat improving, while businesses remain cautious - feeling the aftereffects of the RBA’s 10th rate hike. Despite the RBA’s comments previously alluding to a potential pause on rate hikes soon - business confidence fell by 4 points in February. The next gauge we will get on Australia’s economy is due on Thursday - with all-important unemployment rate released for February. Bloomberg’s consensus is suggesting the jobless rate will fall from 3.7% to 3.6%, with 50,000 jobs expected to be added last month. If the data shows employment is rising, contrary to what the RBA expects, then the Australian dollar would likely gain pace, as the RBA would gain power to keep rising rates by 0.25%.
The UK labor market data will be released on Tuesday and investors will be scrambling to gauge how much room does the BOE have to tighten further. Bloomberg consensus expects the unemployment rate to rise to 3.8% in the three months to January from 3.7% previously, with headline jobs growth likely to ease to 60k from 102k in January. However, even with a slightly softer jobs report, the BOE is expected to continue its hiking cycle in March as activity data has been stronger than expected, but the trend in labor market from here will be key to see where BOE could pause its tightening cycle. Focus also turns to UK’s budget announcement tomorrow.
For what to watch in the markets this week – read or watch our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy