MARKET WRAPS

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Flash PMI data for eurozone, France, Germany, UK; UK retail sales, Bank of England market participants survey results; trading updates from Smiths Group, Investor, Babcock International, OMV, B&M European Value, Deutsche Boerse

Opening Call:

Shares are off to a shaky start in Europe on Friday, weighed by concerns about banking-sector stability. In Asia, stock benchmarks were broadly lower amid cautious sentiment; Treasury yields dropped; the dollar gained; while oil and gold both fell.

Equities:

European stocks look set to dip on Friday, as worries about potential weakness in the banking system resurfaced after a raft of interest-rate decisions, including those from the Bank of England and Federal Reserve.

Bank-stability risks are back in focus, a day after Federal Reserve Chairman Jerome Powell said policy-makers would use their tools to protect depositors.

Meanwhile, Treasury Secretary Janet Yellen said she wasn't considering ways to guarantee all bank deposits at a Senate hearing.

"The contradictions between Powell's comments and Yellen's were confusing to the markets, but Yellen's remarks [on Wednesday] were seen as backtracking on her commitment to helping keep small banks and their depositors safe in the event of panic setting in, which is the leading cause of contagion," LPL Financial said.

"The last thing markets need now is confusion and reneging from its top government officials, but that is exactly what happened."

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The Bank of England is likely to pause rate rises after Thursday's 25 basis points rate increase, as the U.K. economy is more sensitive to rate increases compared to the U.S. and the eurozone, said UniCredit Research.

The U.K. has a greater proportion of short-term fixed-rate and variable-rate mortgages than the U.S. and eurozone and this makes its economy more sensitive to rate changes, it said.

Goldman Sachs said the Fed and ECB will each hike 50 basis points further from here.

The Fed, BOE, ECB, and SNB all increased their policy rates over the last week, signaling that recent interventions to stem deposit outflows and promote liquidity are sufficient to allow central banks to continue their rate hike campaigns for now, GS said.

The policy rate path of major central banks will ultimately depend on how much stricter lending standards weigh on growth, it said.

Forex:

The dollar strengthened on possible safe-haven demand spurred by lingering financial stability concerns.

Investors still appear to be seeking safety amid banking turmoil as the VIX Index has remained at a relatively high level, said CMC Markets.

Goldman Sachs said the FOMC's meeting shows Fed officials think tighter credit conditions could be a substitute for rate increases to slow the economy, much as economists do.

But these two policy channels have opposite implications for the dollar, GS said. "Unlike a higher risk-free rate, tighter credit conditions lower the expected real rate of return on domestic assets and thereby deter portfolio flows and weaken the currency."

AMP Capital said it seems the major central banks that have tightened since the banking turmoil are determined to show they have measures to deal with financial stability issues and so monetary policy is free to deal with inflation.

The ECB and Fed hiked but toned down hawkish guidance on rates as a result of the turmoil, while the BoE was likely forced over the line by a rebound in inflation reported earlier this week. The SNB is still playing catch up to the ECB with a policy rate of just 1.5%.

Bonds:

Treasury yields fell, as markets increasingly priced in a pause in monetary tightening, likely after only one more 25-basis point hike in May.

Economic data and signs of further economic damage from the banking crisis are likely to keep moving Treasury markets.

ING said the Bank of England may have reached its peak policy rate in the current cycle after a 25-basis-points rate increase on Thursday to 4.25%.

Short-dated gilt-yield volatility should decline as a result, it said, adding that it expects the BOE to hold rates at their current level in the coming months.

"Stability in policy rates means lower volatility in front-end yields, if the BOE can stick to its message of patience," it said. "This volatility will be displaced to the longer end, especially if a resilient economy pushes the inflation premium higher."

Fed funds futures traders priced in a 70% probability that the Fed will stand pat in May, and a 30% chance that policy makers will raise rates by another 25 basis points to between 5% and 5.25% by then, according to the CME FedWatch tool.

The central bank is mostly expected by traders to cut its main interest-rate target range to between 4% and 4.25%, or lower, by the year-end despite Powell's statement on Wednesday that "rate cuts are not in our base case."

"The Fed is no longer what markets are worried about and neither, really, is a recession," Commonwealth Financial Network said. "What markets are now worried about is a financial crisis."

Energy:

Oil headed down in Asia, extending overnight losses.

There could be concerns the U.S. government may not be able to refill its strategic reserve in the short term, after U.S. Energy Secretary Jennifer Granholm told lawmakers that refilling the SPR would be difficult this year, ANZ said.

"The market is also becoming increasingly impatient with the rebound in economic activity in China," ANZ said, adding that consumer spending there remains subdued despite a sharp pickup in travel demand.

Traders also weighed the prospects for an economic recession a day after the Fed delivered an interest rate hike and signaled at least one more increase this year.

Metals:

Gold prices weakened after settling overnight at a more than a year high on declines in U.S. Treasury yields and dollar weakness.

The precious metal may remain in an upward trajectory over the medium term, "especially if financial turmoil resurfaces and threatens to create systemic risks," DailyFX said.

"Throw in some risk-aversion on the back of Yellen's comments on the government not considering blanket insurance for bank deposits and gold is beginning to shine once more," Oanda said.

The Fed's 25 basis-point rate hike, coupled with the ongoing banking crisis, has further strengthened gold's position as a "safe-haven asset, " said Joseph Cavatoni, chief market strategist, North America, at World Gold Council.

"This has resulted in a noticeable increase in the price of gold, indicating that both short-term speculators and long-term investors are showing a strong interest in this asset."

"Although there may be ongoing short-term volatility in the gold market as investors respond to the rate decision and economic outlook, we expect investors to consider strategic long-term allocations to gold over the course of the year," said Cavatoni.

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Copper prices were down amid market volatility due to the U.S. banking crisis.

All eyes will be on whether the U.S. Fed will pause rate increases amid the banking turmoil, which could be good news for prices of the metal, ANZ said.

If the U.S. dollar weakens, that could also support copper prices, ANZ added.

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Chinese iron-ore futures fell amid worries over demand.

The top iron-ore exporters are likely to increase their shipments in the coming months as supply-side disruptions abate, but this comes amid signs of weakening demand, ANZ Research said.

Chinese steel mills have been cutting their selling prices, while spot prices for rebar used in construction have dropped sharply, it added.


TODAY'S TOP HEADLINES

Yellen says U.S. would take 'additional actions' to stabilize bank system if necessary

Treasury Secretary Janet Yellen on Thursday told lawmakers that the federal government would take extra steps to stabilize the U.S. banking system if necessary.

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Research firm GfK said its consumer-confidence barometer increased to minus 36 in March from minus 38 a month earlier, in line with economist estimates in a poll by The Wall Street Journal.


TikTok Fight Rocks U.S.-China Relations

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The hearing Thursday, peppered with withering attacks on TikTok from both Democrats and Republicans, ran more than five hours and underscored growing concern about Beijing's potential influence over the app. U.S.-China relations are already frayed over trade, Taiwan, technology and geopolitical rivalries.


Iran Could Produce Nuclear Weapon in Several Months if It Decides to Do So, Mark Milley Says

Iran would need only several months to build a nuclear weapon if Tehran opted to produce a bomb, Gen. Mark Milley, chairman of the Joint Chiefs of Staff, told Congress on Thursday.

Gen. Milley's assessment provides a significantly shorter estimate for how quickly Tehran could become a nuclear power than other public estimates by Western officials and adds to mounting concern about the advances in Iran's nuclear program.


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03-24-23 0115ET