MARKET WRAPS
Stocks:
Equities in Europe traded higher on Friday with the banking sector catching a break following the First Republic Bank bailout.
In regional markets, the DAX has stabilized for now, but the downward trend could pick up again in the coming week as solvency issues remain for U.S. banks, CMC Markets said.
Small- and medium-sized banks in the U.S. have overcome the liquidity crisis for the time being, and as such the German share index has stabilized, it said.
However, despite the quick liquidity problem resolve, the question remains how solvent the small- and medium-sized banks in the U.S. are in the long term, CMC added.
"Liquidity alone doesn't restore solvency. If they keep accumulating losses due to bad loans, these reduce the equity ratio of the institutions," it said. "This subject should keep the stock market busy."
Credit Suisse
On Friday, Credit Suisse's assets continued to show signs of stress, despite its lifeline from the SNB, as investors remained wary.
Prices on the Swiss bank's bail-in bonds, which get wiped out in case the bank runs into serious trouble, have made little recovery. Bid prices on the 2027 bonds stood at 35.5 cents on the dollar on Tradeweb, up slightly from 34.5 cents Thursday. They traded close to 77 cents at the start of the week.
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Following the ECB rate hike, the focus shifts to the Federal Reserve and whether it will raise interest rates next week.
"The ECB's clear focus on inflation, and not on bank stress, reinforced the expectation of a 25bp hike from the Fed," Swissquote Bank said, adding that "at the wake of the ECB decision, activity on Fed funds futures gives more than 80% chance for a 25bp hike," which was around 65% before the ECB decision.
Other Stocks to Watch
European banks are in the strongest position now than since the 2008 global financial crisis, Jefferies said. Europe's banking sector has improved its solvency, liquidity and profitability.
The sector's nonperforming loans declined to 2% in August, compared with 6.5% in December 2015, while its liquidity coverage ratio went to 163% in September 2022 from 140% in December 2016, Jefferies said.
Its fully-loaded CET1 ratio also improved to 14.8% in September 2022 from 11.5% in December 2014, it added.
"We are not complacent as this portrait of strength can - as has been seen over the past week on both sides of the pond - also be undermined by confidence issues."
Jefferies said it favored diversified, capital-rich banks including Unicredit and BNP Paribas.
Read European Banks Read-Across Is on Profitability, Not Solvency Crisis
Read Market Confidence in European Banks Is Fragile
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European telecommunication companies seem more confident on the prospects for industry consolidation and perceive more support from regulators, Citi said, citing management comments at the bank's tech, media and telecom conference.
The industry sees the proposed merger between Orange's Spanish operations and Masmovil as a test case for regulators' tolerance toward greater consolidation, Citi said.
Cross-border consolidation, which is desired by the EU, could eventually be on the table, but that could depend on more favorable regulation, it added.
"In general, there is cautious optimism that the previous combative stance at regulatory/antitrust bodies has started to shift, subject to the outcome in Spain."
Further ECB Reaction
Sticky inflation justifies further interest-rate rises by the ECB but the peak rate might be lower than previously seen, SEB said.
"Our base case is that the ECB continues to raise rates in the upcoming meetings, but we see downside risk to our current forecast of the deposit rate peaking at 4.00%."
Money markets currently price the peak deposit rate at around 3.40%, according to Refinitiv data.
Read Betting on End of ECB's Tightening Cycle Seen as Premature
Read ECB Rates Likely to Go Higher, Barring a Sinister Turn in Banking
U.S. Markets:
Stock futures wobbled as First Republic shares fell premarket after the the bank's board suspended its dividend and the largest U.S. lenders swooped in to rescue it.
Read more here
Other Stocks to Watch
FedEx reported fiscal third-quarter earnings that easily topped analysts' estimates and the stock jumped 11% in premarket trading.
U.S. Steel stock is surging. Its forecast bodes well for other steelmakers.
On the economic calendar are data on industrial production and consumer sentiment.
Forex:
The euro continued to strengthen but gains are likely to remain limited, UniCredit Research said.
"The lack of any forward guidance on future policy moves from the ECB is probably what is still preventing EUR/USD from benefiting further from the new rate hike."
It said the fact that EUR/USD is struggling to rise much above 1.0650 despite the rate rise indicates that upside potential for the euro remains modest for now.
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The ECB's latest policy decision increases the chance of the Bank of England lifting interest rates next week but the euro-sterling exchange rate may remain driven by European bank developments, ING said.
The BOE could raise rates by 25 basis points at its March 23 meeting, ING said.
For now, however, EUR/GBP is a thermometer of troubles at Credit Suisse, it said.
EUR/GBP falls when risks to the Swiss lender escalate as the U.K. banking sector is considered less exposed than the eurozone, ING said.
"A rebound beyond EUR/GBP 0.8800 likely requires more improvement in European banking sentiment."
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The dollar dipped and could fall further as the Fed may soon pause its interest rate-rise cycle due to troubles in the U.S. banking sector, Swissquote Bank said.
The Fed could raise rates by a final 25 basis points before pausing. That was the expectation at the beginning of this year before the Fed's peak rate expectations shot up to 5.6% but that bet is "nearly dead," Swissquote Bank said.
"The impact of Fed tightening on banks could help to restrict borrowing from here and ease inflation, and need for further Fed action."
Bonds:
ECB interest-rate rises are becoming increasingly less relevant for eurozone country spreads, with the focus shifting back on fundamentals, Societe Generale said.
"Investors look for signs of a debt crisis," it said, adding that the risk of an imminent sovereign debt crisis is "very unlikely."
That said, debt levels remain at historical highs, especially for Italy, avoiding a steady narrowing of the 10-year Italian BTP-German Bund yield spread.
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Euro corporate bonds are expected to trade in small ranges today, said UniCredit Research.
"In the absence of adverse news flow, we expect European credit to end the week range bound today."
Primary market activity has dropped to one EUR500 million non-financial issue this week compared to EUR12.3 billion issued in the past two weeks, it said.
Energy:
Despite the recent oil price slump, JPMorgan maintains its view that prices should rise this year as the market tightens and China's demand bounces back.
"Oil demand is being repriced, but we see little change in fundamentals and are inclined to ride out financial sector volatility, keeping our price forecasts unchanged for now."
The bank points to an OPEC+ advisory meeting next month and the possibility that the U.S. may choose the present price slump to refill its strategic oil reserves as events to watch out for.
JPMorgan forecasts Brent prices at $89 a barrel in the second quarter and $94 in the fourth quarter.
Metals:
Base metals and gold prices were solidly higher, helped by a turnaround in global risk appetite following the latest news on First Republic Bank.
"Investor sentiment feels better heading into the weekend," Peak Trading Research said. As well as the moves from Wall Street, the ECB dropping its commitment to keep raising interest rates at a steady pace was welcomed by the market, helping investors to move "risk-on," it added.
Aluminum
Prices for aluminum have become desensitized to shifts in Russian supply for the base metal, according to Fitch Solutions.
Last year's government sanctions and self-imposed bans from companies on Russian production have all but freed the price from effects of shifts in Russia's output, it said.
Fitch said the recent U.S. imposition of 200% tariffs on aluminum originating in Russia having little effect on prices, with just a 1.4% move higher on February 27, the next trading day after the move.
It said that with the U.S. looking to localize production and Europe sanctioning Russian material it expects Russian aluminum output to fall by 3% this year on slowing global demand.
DOW JONES NEWSPLUS
EMEA HEADLINES
EDF to Step Up Inspections After Discovery of New Reactor Defects But Doesn't See Hit to 2023 Output
Electricite de France SA doesn't expect any hit to its nuclear output this year from the detection of defects at some of its reactors, but is stepping up inspections, it said.
The state-controlled French utility said earlier this month it had found a stress-corrosion defect on a weld in a reactor at its Penly 1 plant in Normandy, characterized by a large depth and probably originating in repair work during construction. Another defect was found at Penly 2 resulting from thermal fatigue, EDF said.
China's Xi to Meet Putin in Moscow Next Week
Chinese leader Xi Jinping plans to visit Moscow next week for talks with Russian President Vladimir Putin, the Kremlin said Friday, showcasing the deepening relationship between Beijing and Moscow as the war in Ukraine drags on.
During the visit, which will take place March 20-22, the two leaders will discuss "topical issues of further development of the comprehensive partnership relations and strategic cooperation between Russia and China, " the Kremlin said. Several bilateral documents will be signed during the visit, it said.
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