MARKET WRAPS
Watch For:
EU euro area money supply; Germany business climate index; trading updates from Commerzbank, Carnival
Opening Call:
Shares look set to rise in Europe, despite lingering fears about the health of the banking system. In Asia, stock benchmarks were mixed; Treasury yields broadly rose; the dollar was barely changed; while oil faltered and gold weakened.
Equities:
European stocks are poised to open in positive territory on Monday, tracking Friday's gains on Wall Street, as markets recover from European banking-driven fears.
A jump in the cost of Deutsche Bank's credit-default swaps helped reignite banking-sector worries on Friday.
Bank concerns have cast a "heavy cloud over the market," with investors worried about "weak links," said BMO Wealth Management. It expects investors will be looking to sell, potentially into any rallies, "until some of these clouds are lifted."
"Clearly, somebody thinks there are some concerns there," said Charles Schwab. The problems facing European banks stem back to the era of negative interest rates, which set banks up for large losses on their bond holdings, it said.
"The thing that's important to know about financials is there probably are banks that have problems, but there are others that don't," Charles Schwab said. "People need to do some research."
However, while financial sector upheavals are relatively common, people concluding that recent bank failures in the U.S. and Europe represent the start of another GFC are being hasty, said Shayne Elliott, ANZ's CEO.
The causes of each event are quite different. There are lots of factors here that were visible in the previous turmoil or crises, including the GFC, "but actually, when you really get the microscope out, the causes and what's going on here are really, really different than the GFC," Elliott said.
Traders ramped up their wagers that the Fed will keep interest rates on hold at its May meeting. The probability implied by interest-rate futures stood at 88%, compared with 73% Thursday, according to CME Group.
Forex:
The dollar was little changed in Asia amid risk aversion, which boosts the safe-haven appeal of the U.S. currency.
Worries about banks' stability continue to be a source of volatility, NAB said, noting that Deutsche Bank experienced selling pressure Friday, as investors searched for the next victim in the current turmoil.
"The U.S. dollar had spent much of the week on the back foot amid a growing belief that banking sector issues might prove a largely U.S.-specific problem," CapEcon said. "But that narrative, and price action, has again been turned on its head today (Friday) as European banks have come under renewed pressure."
CapEcon is sticking with its forecast that the dollar will appreciate as risk appetite sours over the coming months.
Difficult policy dilemmas are ahead for central banks, with financial stability concerns challenging them, Bank of America said. "We would also expect weaker labor markets to bring new challenges to the fore soon."
It expects a weaker USD eventually, seeing it as overvalued, but adds that "the USD call is an inflation call for as long as the Fed remains focused on inflation, suggesting that sticky inflation will keep the USD historically strong for some time, despite some recent weakness."
"Safe-haven concerns were always a risk, but the fact that U.S. banks were at the center of concerns made it difficult for the USD to participate," ANZ Bank said. "However, with the Fed mulling extra support for banks and Europe now in the spotlight, it may become a more powerful factor over coming days."
Bonds:
Treasury yields were mostly higher, as traders assessed the latest signs of bank stress.
Markets are now expecting the Fed to keep rates unchanged in May and start cutting in July.
"The recent banking stress put markets on high alert and was a most unwelcome development at a time when the Fed is trying to engineer a soft landing for the U.S. economy," said RBC Wealth Management.
"We believe the Fed is indeed done raising rates and that it will need to pivot to two 25 basis point rate cuts later this year as U.S. recession risks materialize, with rates ending 2023 at 4.50 percent, well below the Fed's current projection."
Energy:
Crude oil prices wavered in Asia.
Prices could be supported by improved sentiment as U.S. officials have moved to ease concerns over the banking system, although concerns remain on whether China's economic activity has managed to recover, ANZ said.
The U.S. government has said it will protect bank deposits, which will help to calm nerves, while hopes rise for a pause in interest-rate increases from the Federal Reserve, ANZ noted.
There are some expectations in the market that the "major central banks are going to pause their rate hikes, but that's not to say the economy will find relief," said Fawad Razaqzada, market analyst at City Index and FOREX.com.
"We have seen some of the implication of higher interest rates on the banking sector already in the last couple of weeks, but the full impact on the economy is yet to become apparent."
For now, "the general feeling is that global economic activity will slow down as a result of higher interest rates, which should hurt demand for oil," he said.
Metals:
Gold prices slipped in Asia, following hawkish comments from Fed St. Louis President James Bullard after better-than-expected flash PMI data, said Oanda.
According to Mr. Bullard, the central bank is nowhere near done with its tightening stance, Oanda added. Spot gold is down 0.2% at $1,973.54/oz.
Gold continues to be influenced by various fundamental forces ranging from [Federal Reserve interest rate] hike expectations, lingering banking fears, dollar weakness, and falling Treasury yields," FXTM said.
But "given how the recent chaos across markets has fuelled speculation around the Fed cutting rates in 2023, gold has the potential to push higher."
---
Copper edged higher amid hopes for a dovish policy pivot by central banks including the Fed.
Market participants anticipate monetary authorities turning dovish or pausing plans for rate increases, ANZ Research said, noting that expectations of a credit crunch are dominating.
A potential shift in U.S. monetary policy should spur further dollar weakness, which will probably boost investor appetite in the base metals sector, it said.
Commonwealth Bank of Australia expects copper supply growth will outpace copper demand growth in 2023, even with a number of disruptions to supplies in places including Indonesia and Peru. "That should weigh on copper prices through 2023, particularly if the banking crisis escalates, " it said.
Copper prices have had a strong inverse correlation with the U.S. dollar in recent times, and an escalation of banking-sector turmoil could push the greenback sharply higher, it added.
---
Chinese iron ore futures rebounded, following last week's retreat when investor sentiment was weighed by the global banking crisis.
However, analysts expect the weak sentiment may be extended, as a lot of uncertainty amid the financial turmoil remains.
"The price still has downside risks in the short term, but the economic recovery trend is clear in the medium term," which likely supports prices, said China Futures.
UBS is cautious on iron ore in the short term, expecting China's recovery to be led by consumption rather than construction.
It is also wary of prices further out. In the medium term, rising supply from Australia and Brazil and weak demand because of steel scrap growth are likely to be price headwinds, it said.
"We believe China's steel demand has peaked and will decline medium-term as China drives its decarbonization agenda," it said.
TODAY'S TOP HEADLINES
Ukraine Calls for U.N. Security Council Meeting Over Belarus Nuclear Threat
Ukrainian officials called for an emergency meeting of the United Nations Security Council, after Russian President Vladimir Putin announced plans to deploy tactical nuclear weapons in Belarus.
Ukraine's foreign ministry, in a written statement released Sunday, said moving the weapons to Belarus would undermine nuclear nonproliferation treaties.
St. Louis Fed's James Bullard Says Bank Stress Doesn't Have to Derail Economy
Federal Reserve Bank of St. Louis President James Bullard said that today's financial stress can be contained even as the Fed continues to fight inflation.
Measures of financial stress are much lower than they were during the financial crisis of 2007-08 and the early days of the Covid-19 pandemic, he said during a speech in St. Louis on Friday, adding that the Fed and other regulators have the tools they need to address today's banking crisis.
Biden says he doesn't see anything 'about to explode' in banking sector
President Joe Biden on Friday called U.S. banks in "pretty good shape," but said it would take time for things to "calm down" in the industry after the failures of two institutions.
Speaking in Ottawa, Canada, at a news conference with Prime Minister Justin Trudeau, Biden was asked about the U.S. response to turmoil in the banking industry and said: "I don't see anything on the horizon that's about to explode."
Ukraine Offensive Takes Shape, With Big Unknowns
After months of new weapons deliveries from the West, Ukraine is poised to punch back at Russia's invasion forces in coming weeks-a high-risk campaign that will set the course of subsequent battles and potential peace negotiations.
Ukraine's operational plans remain confidential, but some aspects of what is to come are discernible from a look at the equipment each side has-or doesn't have-and their recent performance on the battlefield. Both are struggling to make gains and have been burning through munitions at rates not seen since the two world wars.
Israel's Netanyahu Fires Defense Minister as Pressure Against Judicial Overhaul Mounts
(MORE TO FOLLOW) Dow Jones Newswires
03-27-23 0015ET
