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Global market volatility was at a premium last week as financial-related stocks suffered disproportionately. On Wall Street, the Dow Jones fell -0.15%, but the tech-heavy Nasdaq rose 4.41%. Across the Atlantic, the DAX 40 and FTSE 100 fell -4.28% and -5.33%, respectively. This is because Japan’s Nikkei 225 fell -2.88%, while Hong Kong’s Hang Seng Index rose 1%.
Regional banks felt the collapse of Silicon Valley Bank earlier this month. Despite receiving a financial lifeline from major banks, Frist Republic Bank shares collapsed over 70% over the past 5 trading sessions. Problems at Credit Suisse further compounded problems in the banking sector, as a few major banks were reported to be limiting trading with the lender or considering it.
As a result, traders were quick and aggressive to price in rate cuts from the Federal Reserve. Compared to March 10, markets priced in cuts that look 6 months out by as much as 100 basis points. That would leave the Federal Funds rate around 4.25% after prior increases to 5.25%. The 2-year government interest rate fell.
In response, the US dollar fell as markets focused on a dovish Fed. Anti-fiat gold rallied and is up about 8.9% this month. We haven’t seen this kind of performance since July 2020 during the Covid pandemic, when central banks rushed to cut interest rates around the world. Meanwhile, the price of WTI crude oil collapsed 13.55% last week, the most since February 2020.
Ahead, all eyes will be on the Federal Reserve on Wednesday. All bets on a 50 basis point hike have disappeared and there are growing expectations of an end to the tightening cycle. But just over 50% of expectations favor a 25bps increase. Either way, this opens the door for a surprise either way if the odds get closer to 50-50. The Bank of England will also set interest rates. What else is in store for the markets in the coming week?
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How Markets Did – Week 13/3
Basic forecasts:
Euro (EUR) Weekly Forecast: Hawkish ECB Raises Rates, Bank Shares Highlight Risk
The ECB raised interest rates by 50bps on Thursday, saying it will do more to fight inflation. The euro got a small bid, but eurozone bank stocks fell further.
GBP Forecast: UK CPI and BoE rate decision complicated by bankruptcy route
BoE officials have the unenviable task of wading into the current turmoil in the banking sector. UK Inflation data on Wednesday along with the FOMC meeting and projections.
The US Dollar Outlook depends on the Fed’s next move. Will the FOMC hike or pause?
The US dollar trade bias will be defined by the Fed’s policy outlook next week. Traders should prepare for the possibility of a dovish guidance due to rising financial instability risks.
Technical forecasts:
Nasdaq 100, Dow Jones, S&P 500 technical forecast: Mixed week offers neutral outlook
There was a disproportionate surge in tech stocks last week as the Nasdaq 100 roared higher, but the Dow Jones was left behind. Broadly, the US equity technical outlook is neutral.
— Article text written by Daniel Dubrovsky, Senior Strategist for DailyFX.com
— Individual articles composed by DailyFX team members
To contact Daniel, follow him on Twitter:@ddubrovskyFX