• Tuesday’s trading session and yesterday’s Asian session both suggested that the US government & Fed’s combined measures to limit the fallout from the Silicon Valley Bank and Signature Bank’s collapse managed to restore market confidence. This lasted until Credit Suisse’s largest shareholder (Saudi National Bank) decided to put the spotlight on the troubled Swiss lender by ruling out raising its 9.9% stake. It sent the company’s stock price in tail spin with investors worrying about liquidity issues and again raising the specter of global financial stability risks. Core bond yields followed Credit Suisse’s share price south with investors questioning central bank’s ability to push through with the flagged 50 bps rate hike in case of the ECB (this afternoon) and to implement another 25 bps rate hike in case of the Fed (next Wednesday). German bond yields fell 26.6 bps (30-yr) to 48.3 bps (2-yr). The German 10-yr yield lost an uptrend line in place since December and tested 62% retracement on the increase from the December low to the March high (2.13%). EU swap yields ended 10 bps (10-yr) to 21 bps (2-yr) lower. US yields lost 16 bps (30-yr) to 36 bps (2-yr). The US 10-yr yield is tested support around 3.4%. The YTD low stands at 3.32%. Risk aversion ruled European dealings with main equity indices ceding around 3.5%. The banking sector obviously underperformed (-8%). Yesterday’s market focus on Credit Suisse and Europe in general and the loss on interest rate support pulled the single currency lower. EUR/USD closed at 1.0577 from an open at 1.0733, testing the March low (1.0525) in the process. Key support stands at 1.0484/61 (YTD low/38% retracement on Sep/Jan rally). EUR/GBP closed at 0.8773 from an open at 0.8828, testing the YTD low at 0.8722. Peripheral yield spreads vs Germany widened by 19 bps for Greece, by 14 bps for Italy and by 3-7 bps for most other countries.
• Credit Suisse overnight announced that it plans to take up CHF 50bn offered in liquidity by the Swiss National Bank (fully collateralized) under a Covered Loan Facility as well a short-term liquidity facility. It also announces to repurchase certain senior debt securities for cash of up to approximately CHF 3bn. It helps restore confidence in Asian trading, but the proof of the eating will follow during European hours. Apart from financial stability, focus turns to the ECB meeting. Lagarde and co vowed to lift rates by another 50 bps at today’s meeting. In light of recent events, money markets expect a more moderate 25 bps hike. For some reasons, we expect the ECB to stick to the 50 bps hike. First as the central bank stayed radio-silent over the past couple of days. Second as increased core CPI forecasts can’t be put aside. Recent events have no immediate impact on the real economy neither. Macroprudential measures should in first instance come to the rescue. Third, as it allows the ECB to keep a wait-and-see approach going into the May policy meeting. Downshifting to a 25 bps rate hike today would probably require another commitment to keep hiking in May (because of inflation dynamics) which risks complicating the picture given increased global uncertainty and will be tough to communicate (vs sticking to the flagged +50 bps). Finally as downshifting to 25 bps could be seen as a panic move and amplify market turmoil.
• New Zealand Q4 GDP data showed an unexpectedly sharp contraction of 0.6% Q/Q resulting in only a 2.2% Y/Y growth figure. In Q3, the economy still showed solid growth at 1.7% Q/Q. De decline in activity was rather broad-based as 9 of 16 industries experienced a decrease in activity. Today’s data are raising the risk that the economy might be heading for a recession. Since October 2021, the Reserve Bank of New Zealand raised its policy rate from 0.25% to 4.75%. At its Feb 22 meeting, the RBNZ maintained its guidance to raise it further to a potential rate peak of 5.50%. Money markets now only discount a 70% chance of an additional 25 bps rate hike in April with a peak rate between 5% and 5.25%. The kiwi dollar declined from the NZD/USD 0.6190 area to currently near 0.616.
• February Australian labour market data were much stronger than expected. The economy last month added 64.5k jobs (-10.9k in January). The gain was solely due to a rise in full-time employment. The unemployment rate declined sharply from 3.7% to 3.5%. The participation rate rose to 66.6%. The data suggest that the Reserve Bank of Australia could maintain a tightening bias. However financial stability considerations will come into play after recent market turmoil. Money markets currently rule out further rate hikes. The strong labour data failed to trigger a rebound in Australian bond yields this morning (2-yr: -25 bps at 2.87%). The Aussie dollar is little changed at AUD/USD 0.664.
The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially eventually pushed the 10-y Bund to a new cycle top north of 2.50%. The collapse of two US regional bank raised questions on systemic risks, putting in doubt central banks’ future tightening plans and triggering a flight to safe haven assets. We expect the ECB to stick to its plans, while abstaining from new guidance as the banking story develops.
December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets refused to follow this guidance up until the wake-up call coming from this month’s eco data. The US 10-yr yield moved above 4% before the regional bank implosion. Support at 3.5% survived in the aftermath. Stubborn inflation and financial stability risks hang in the balance at next week’s FOMC meeting.
USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The dollar regained momentum on strong US eco data (Jan/Feb). The impact on FX markets from the SVB and Signature bank collapse/bailout is much smaller than on FI or equity markets.
The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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