MARKET WRAPS

Watch For:

EU Construction output; U.K. Chancellor Jeremy Hunt takes questions in the House of Commons, Chancellor Jeremy Hunt appears before the House of Lords Economic Affairs Committee; Germany ZEW indicator of economic sentiment; trading updates from Kingfisher, RWE

Opening Call:

Stock futures point higher early Tuesday, as investors shift their focus to the two-day Federal Reserve policy meeting. In Asia, stock benchmarks rose; Treasury yields gained; the dollar advanced; while oil fell and gold rose.

Equities:

Stocks could open slightly higher in Europe on Tuesday, tracking Wall Street's rebound, as investor concerns over the banking sector eased and focus shifted to the Fed's interest-rate decision this week.

The Fed, faces a dilemma at its policy meeting on Tuesday and Wednesday as it tries to balance its inflation fight against worries over the stability of the financial system.

While upheaval in the banking sector isn't welcome, it is a sign that the Fed's monetary policy efforts are starting to tighten financial conditions, which could be an important turning point in the battle to bring down inflation, said James Demmert, chief investment officer at Main Street Research.

Fed-funds futures traders, who earlier this month had braced for a rate hike of 50 basis points, or half a percentage point, now see a 26.9% chance that policy makers will leave rates unchanged on Wednesday and a 73.1% chance of a 25-basis-point, or quarter-point, increase.

"The Fed is between a rock and hard place when it comes to trying to bring down inflation by hiking rates and not putting undue pressure on the banking system," Gennadiy Goldberg, senior U.S. rates strategist at TD Securities said.

"I think they try to break both into two separate categories, by gradually hiking rates while offering support to the banking system through its new lending program."

Forex:

The U.S. dollar strengthened early Tuesday, as focus remains on developments in the banking sector and the Fed's rate decision.

Market sentiment appears to be on the mend, following Wall Street gains overnight, as immediate worries over the strength of the global financial system have dissipated, says MUFG Bank.

Going forward, market participants will probably continue to watch for any sentiment-driven moves and on the Fed's policy decision for coming sessions, it said.

"Even though FX markets were thrown somewhat by the apparent tension between lower US yields and weaker credit, the historical template is fairly unambiguous: lack of rate support has not prevented dollar strength in the presence of credit stress," JPMorgan analysts said.

The left-hand side of the dollar smile--where the dollar strengthens amid weak growth lower yields--operates in an inverse rates vs. FX correlation climate, they said, and "the underlying macro-financial pathology that necessitates lower yields is the primary determinant of dollar direction than the symptom--lower yields--itself."

Bonds:

Treasury yields mostly rose as traders focused on the likelihood that the Fed will likely raise rates despite the banking-industry concerns.

"Three difficult issues confront policy makers and markets this month," said Jim Vogel, executive vice president at FHN Financial.

One is that the actions taken to address individual bank problems have undermined the value of the securities and systems that support all banks, he said.

The second is that "in previous market distress, households moved their assets into banks because they were a safe haven [and banks] were the right kind of anchor, but not today.

And third is that looser monetary policy "has been a valuable step in previous distress episodes ... again, not available today."

Energy:

Oil futures gave up their early morning gains to decline in Asia as focus shifts to the Fed meeting outcome.

"With the recent unfortunate collapse of SVB and Credit Suisse, market uncertainty has been extremely prevalent - coupled alongside rising interest rates, inflation hovering at multi-decade highs, and geopolitical tensions," said Ruth Tan, account manager at W Communications.

U.S. oil prices had broken down out of the 2023 trading range to reach multi-year lows last week, with "contagion fears stemming from the first bank failures since the Great Financial Crisis triggered massive volatility and significant risk-off money flows early last week, said Tyler Richey, co-editor at Sevens Report Research.

However, there is technical support for West Texas Intermediate crude dating back to 2021 between $62 and $66 a barrel and WTI is also "oversold as it has been since COVID, on a daily time frame chart," he said.

"Volatility is likely to linger this week, with broader financial market concerns likely to remain at the forefront. In addition, we have the FOMC meeting this week, which adds further uncertainty to markets," ING said.

Metals:

Gold prices gained slightly in Asia, after settling at their highest in about 11 months on Monday.

Near-term focus will be on the FOMC meeting, in which "traders should find out quickly if gold has enough momentum to retest the record highs seen a few years ago," Oanda said.

Paul Wong, market strategist at Sprott Asset Management expects gold to continue to gain in the short to medium term, with woes in the banking sector likely "still in its early stages."

"Physical buyers have driven gold, and now investment buying has likely joined in," he said.

The Fed "cannot fight inflation and fight a banking crisis at the same time," Wong said.

The central bank needs to "shore up the banking system first. This opens the window for left-tail inflation outcomes, which high favor gold," he said.

It's important to understand that the move higher for gold will "come in waves," said Brien Lundin, editor of Gold Newsletter.

"We shouldn't chase prices on feverish moves like we saw on Friday, but look to build positions on pullbacks," Lundin added.

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Copper prices fell slightly early Tuesday.

However, the price of the metal could remain supported amid improved risk appetite as worries over the banking sector ease, ANZ analysts said.

The bank also noted that major commodity trader Trafigura said that copper prices could hit a record high over the 12 months as available stocks are shrinking to near zero.

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Chinese iron-ore futures declined.

Concerns that Chinese policy-makers could intervene in iron-ore markets probably drove the decline in prices, said CBA.

China's National Development and Reform Commission on Friday reportedly renewed warnings to iron-ore traders about price gouging and hoarding, it added.


TODAY'S TOP HEADLINES

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A cut-price, $3.2 billion takeover of its top domestic rival, Credit Suisse Group AG, reinforces UBS's position as one of the biggest managers of money for the world's wealthy.


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These problems have now reached the world's financial system, with U.S., European and Japanese banks losing around $460 billion in market value so far in March alone.


Credit Suisse's Death Gives Birth to New Type of Bank Crisis

With Credit Suisse, investors just got their first, messy view of what happens when a big global bank fails in the post-2008 era.

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