Atmosphere: No wedding and three funerals. A lot has happened since our last weekly update. In the meantime, American authorities have closed two banks and orchestrated the rescue of a third. Then the Swiss National Bank came to the rescue of a Credit Suisse in a sorry state to avoid a "bank run". Investors seem to think that the monetary tightening policy is history because they put the risk of weakening the financial sector above the inflationary risk. In the end, stocks did not fall as much as might have been feared, although there was a big swell during the week. As for the bond market, it soared with the drop in yields, as you will read below, with our analysis of the position of central banks, a few days before a major decision by the Fed on its rates.
Currencies. The ECB's monetary tightening, which did not deviate from its strategy despite the banking turmoil, gave the euro a bit of a boost, returning to USD 1.0633. The rebound was not more impressive, however, because the markets are still waiting for the Fed to make a decision on its own policy less than a week away. There is also some wait-and-see attitude with the Swiss franc and British pound... because the SNB and BoE are also on deck next week. EUR/CHF is at 0.9867 and EUR/GBP at 0.8754.
Rates. The European Central Bank has, as previously communicated, effectively raised its key rates by 50 basis points to 3.50%. The next step seems to be less clear as Christine Lagarde did not want to give a precise framework for a possible continuation - or not - of the interest rate hike cycle. The members of the committee are hiding behind the next publications of economic indicators. Admittedly, in a context where bank failures are once again making headlines, it is hardly surprising that the ECB prefers to leave itself some room for maneuver. Next week, all eyes will be on the U.S. Federal Reserve, whose monetary policy decision is expected on Wednesday. According to the latest consensus, a 25 basis point hike should be unanimously supported. However, the Fed is in a difficult position. After having told investors that it was making the fight against inflation its battle horse, a status quo could be particularly badly interpreted. Beyond the loss of credibility, which is already well underway, it would be feeding those who think that a systemic banking crisis, a la 2008, is brewing. In this sense, the technical configuration of interest rates is also telling: US and German 10-year yields are close to turning points at 3.35% and 1.99% respectively. A break of these levels could be interpreted as a tangible sign of a coming recession.
Cryptocurrencies. Against the tide of banking chaos, bitcoin is up 18% this week and is exploring new highs over the year 2023, hovering around $26,200 at the time of writing. With hopes that the US central bank will raise policy rates at a slower pace than expected, risky assets, including bitcoin, are benefiting. For the most ardent supporters of Satoshi Nakamoto's creation, the rise of bitcoin amidst banking tensions proves that it could be a safe haven. Nevertheless, the digital currency is still trading 62% below its November 2021 all-time lows of $69,000.
Timeline. In chronological order, on Tuesday we will have the German ZEW index and a speech by Christine Lagarde. Wednesday, UK inflation and the Fed's rate decision. On Thursday, monetary policy decisions from the SNB and the BoE, plus weekly US unemployment figures. Then on Friday, the March flash PMI indices for the major economies and US durable goods orders.