Forex FOREX PRO WEEKLY, March 13 - 17, 2023

Sive Morten

Special Consultant to the FPA
Messages
18,551
Fundamentals

Now it is difficult choice what to make a central topic of report. Initially it was suggested that Powell's speech should become the one. But, in recent few days we've got so many strong fundamental events that today it will be the problem to put them together in just one body. Because not only payrolls are worthy to be mentioned by SVB Bank collapse and few other minor things. Besides, the latter one has also important political issues, because SVB was not as large that regulators were not able to support it. So, it was done intentionally, but why? Another interesting moment is a timing of collapse. Lehman was in a nose dive for few days, even weeks. Here, SVB blowed in just 30 hours. Amazing. Big question now stands in possible chain reaction, because majority of banks have similar assets structure. And what now common people have in mind? What to do with savings, where to run? Now we have more questions rather than answers.

Political discussion we keep for gold market analysis tomorrow, because SVB crash might be the first step with far-going consequences. It is also interesting to see how your technical analysis comes to reality. Sometimes, you see something but can't explain how it could be. And then something absolutely outstanding happens that everything put on right places, as it was with our Gold analysis yesterday.

Market overview

Week has started with J. Powell speech in Congress. Markets in general, have treated it as hawkish. The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told U.S. lawmakers on Tuesday.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," the U.S. central bank chief said in his semi-annual testimony before the Senate Banking Committee. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said. The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy," Powell said, adding later in the hearing that "the social costs of failure are very, very high."

In his testimony, Powell noted that much of the impact of the central bank's monetary policy may still be in the pipeline, with the labor market still sustaining a 3.4% unemployment rate not seen since 1969, and strong wage gains.

Demand for U.S. dollars in the currency derivative markets surged on Friday to its highest since mid-December, after a meltdown in U.S. banking stocks ignited a wave of investor risk aversion. Three-month euro/dollar cross currency basis swap spreads traded as negatively as -17 basis points , the most since December 14, reflecting a pickup in demand for hard cash. They were last trading at -14.

An index of European banks was heading for its biggest one-day fall since last June, as shares in the region's biggest lenders dropped in sympathy with a steep decline in the value of Wall Street's biggest lenders on Thursday:
1678535399323.png

U.S. labor data for February showed slower wage growth, suggesting an easing of inflation pressures may keep the Federal Reserve's pace of interest rate hikes modest and thereby reduce the greenback's appeal. The U.S. economy added jobs at a brisk clip in February, but slower wage growth and a rise in the unemployment rate prompted financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers meet in two weeks.

Congressional testimony earlier in the week by Fed Chairman Jerome Powell was seen as hawkish and strengthened the dollar as Treasuries pay more in yield than other government debt. The yield on benchmark 10-year Treasury notes fell more than 22 basis points to under 3.70% in the biggest single-day drop in four months. Bond yields move opposite to their price.

"There is a significant, in my opinion anyway, safe-haven bid going on," said Kevin Flanagan, head of fixed income strategy at WisdomTree. "There are concerns about potential banking stress."

Average hourly earnings for all private workers rose 0.2% versus 0.3% in January, and lifted the year-on-year figure to 4.6%. Economists expected hourly earnings to rise 0.3% in February, which would have raised wages by 4.7% annually.
chart.png

Futures for fed funds slid to a 41% chance of a 50 bps hike when Fed policymakers meet on March 22, compared with a 71.6% probability a week ago, according to CME's FedWatch Tool.

The market got ahead of itself on the prospect of a 50 basis-point hike at the next Fed meeting, said Dec Mullarkey, managing director of investment strategy and asset location at SLC Management in Boston. Rate hikes of 25 basis points at this point make more sense as it allows the Fed to keep tightening but extend the period over which they do it to allow the data to catch up," he said.

The "quite important" consumer price index (CPI) scheduled for release on March 14 is now front and center, said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management in New York. "The focus now moves on to the CPI print and the overall financial conditions given what's happening in the banking space in the U.S.," he said.

Besides, U.S. jobless claims rose more than expected last week, raising hopes that a softening labor market will reduce the likelihood of the Federal Reserve re-accelerating the pace of its rate hikes. Initial claims for state unemployment benefits rose 21,000 to a seasonally adjusted 211,000 for the week ended March 4. Economists polled by Reuters had forecast 195,000 claims for the latest week.

"The Fed's going to stay data dependent and that's going to keep us vulnerable to some further pressure in the bond market, which could make the king dollar trade hang around a little bit longer," said Moya.

Economists polled by Reuters expect consumer prices to have risen by 0.4% in February, after rising 0.5% in January:
chart.png


In EU, markets, ready and willing to take a punt on how high rates will go, have rapidly positioned for a move towards 4% by year-end. Morgan Stanley and BNP Paribas reckon this is where rates will peak. Expect ECB chief Christine Lagarde to be put on the spot on how high rates will go. Bond markets have already readjusted to a hawkish path ahead, so there shouldn't be too many surprises.

Citigroup expects the European Central Bank to hike rates by 50 basis points each in March and May to push its policy rates to about 4% by July. Economists led by Arnaud Marès said this course of action by the ECB will more likely result in overtightening of rates to tame record high inflation.
chart.png


Market sentiment has changed after SVB crash

Speaking about J. Powell testimony - In fact, Powell did not say anything new, except that inflation does not behave as the Fed leaders expected. This is not surprising — the monetary theory that the US monetary authorities adhere to (and indeed the entire American economic science) does not recognize the structural nature of the crisis and, accordingly, does not see the structural component of inflation, which we have written about many times. Just to not bother you with multiple charts of consumer spendings, GDP in different countries and others, we bring today Baltic Exchange Dry Index only. This index shows the activity of sea merchant and cargo transfers across the Globe. After short-term improvement after CV19 barriers were off, index has turned south again. In previous reports we've mentioned big drop of export - 20%+ decrease of major Exporters, such as Japan, S. Korea, Taiwan, Hong Kong and China.
image-89.png


Thus, it seems that we could say - the hypothesis about the new inflation spiral after many months of tightening monetary policy is confirmed, but we will find out for sure on next week. Still, the structural crisis continues for sure, in all countries.

Many US small banks now become victims of SVB collapse. EU banks we've mentioned above. European bank shares tumbled on Friday in the wake of a dramatic sell-off in U.S. lenders as concern spread that the sector will be vulnerable to the rising cost of money.
image-88.png


"The market is treating this as a potential contagion risk," said Antoine Bouvet, senior rates strategist at ING in London. "It makes sense to me that a remote probability of a U.S. banking system-wide crisis should also come with a small probability of contagion to Europe," he said.

The crisis at SVB underscored the risks to banks from the end of easy money. Banks typically invest heavily in government bonds, in particular those of their home country. A spike in interest rates has led to a sell-off in bonds, leaving banks exposed to potential losses on the securities they hold. Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted U.S. rates by 450 basis points from near zero, while the European Central Bank hiked the euro zone's by 300 bps.

Other parts of Europe and many developing economies have done even more. There are concerns, however, that price inflation is staying high, something that would drive further rate hikes.

Neil Wilson, Chief Market Analyst at Markets.com, said that the SVB episode could be the "straw that breaks the camel's back" for banks after worries about ever higher interest rates and a fragile U.S. economy. "It is leverage in the system that is the problem," said James Athey, investment director at Abrdn. "Monetary policy way too easy for way too long."

Recent moves in bond and equity markets show that investors are starting to worry that the Federal Reserve may hike rates too far, a senior fund manager at Europe's largest investor told Reuters on Thursday.

Cosimo Marasciulo, head of fixed income absolute return at Amundi, said falling market gauges of inflation expectations, equity market volatility and a deepening yield curve inversion after hawkish comments by Fed boss Jerome Powell showed the concern about a possible policy error. Strong data prints suggesting inflation will be harder to bring down than hoped for have sharply raised market bets on where rate hikes by the Fed and peers this year will end.

"We are maybe very short term in an era in which the market is not convinced about this higher terminal rate, so that's something interesting to watch," said Marasciulo at Amundi, which oversees just over $2 trillion worth of assets. "It's like, the market feels that this push from the Fed might be too much compared to the risk of recession later on during the year."

"It's more likely that (the ECB) will do less rather than doing more," relative to the rate hike expectations priced by money markets, he said, adding he shared a similar view for the Fed.

Near-term, Marasciulo said it makes sense to bet against the market consensus, by favouring a 25 bps move from the Fed, through trades favouring a steepening of the U.S. yield curve.

Jonathan Golub, managing director at Credit Suisse, is among those with a bleak outlook for equities. He described an environment in which persistent inflation squeezes companies’ profit margins and investors spurn stocks in favor of Treasuries and other short-term debt, where yields are at their highest levels in nearly two decades for some maturities.

"A six-month (Treasury) yield effectively guaranteed at 5.25% changes the dynamics for investors when the stock market looks shaky," he said. "You would need to get risk-adjusted returns in equities of at least 1 or 2 percentage points more than that, so in that environment stocks are not worth the effort and are dead money.

Equity valuations, meanwhile, look stretched given the likelihood that rates will remain elevated, dampening future returns, wrote Nicholas Colas, co-founder of DataTrek Research, in a report this week.

"The S&P 500 trades for 17.5x Wall Street analysts’ expected 12-month future earnings, which we continue to believe is simply too high given the uncertainty around rate policy/economic growth," he said. “We therefore remain cautious on US equities. At the same time, history suggests that when the yield of the 3-month Treasury bill rises above that of the S&P 500 - as happened early this year for the first time since the dot com bubble - cash typically outperforms equities, analysts at Capital Economics wrote in a note Thursday. We suspect Treasuries will also outperform US equities later this year, as the biggest tightening of Fed policy in four decades finally takes a toll on the economy," the firm noted.

Shares in leading Italian banks UniCredit and Intesa Sanpaolo fell sharply on Friday following a sell-off in U.S. and Asian banks driven by concerns lenders potentially face losses on their government bond portfolios. Banks have limited the hit to their capital reserves by classing increasingly larger portions of their bond portfolios among assets held to maturity, which prevents them from having to value them at current market prices.

However, European Central Bank Chief Supervisor Andrea Enria warned last November that "this accounting configuration gives a false sense of security in the face of shocks and volatility, in that actual changes in fair value are not reflected in the banks' earnings and regulatory capital figures."

Bank of America Chief Executive Officer Brian Moynihan said on Tuesday the U.S. economy would reach a technical recession starting in the third quarter. The bank expects three quarters of negative U.S. growth led by a corporate slowdown, with the consumer sector in good shape, he said. The bank, he said, predicted the quarterly contractions would range between 0.5% and 1%.

"Our base projection is for a recession to occur in the U.S. economy beginning in the third quarter of 2023, occur through the fourth quarter of 2023 and into the first quarter of 2024," Moynihan said. It's a very slight recession in the scheme of things. I don't think you'll see a deep recession," he said. In our view that is based on a corporate side or a commercial side slowdown, not a consumer side slowdown."

Conclusion:

In fact, we have to try to answer on two questions. Whether SVB bank default is a common issue and soon will spread over whole banking sector, or it is SVB - specific. Second - whether SVB collapse will lead to adjustment of the Fed policy. Speaking on the 1st subject, the roots are SVB specific. It is some life irony, because 10 days before the bankruptcy in early March 2023, at a gala concert in London, SVB was recognized as the best bank in the "Bank of the Year" nomination.

At this very moment, SVB traders have tried to restructure a hole in the balance sheet of 20 billion, having a capital of only 16 billion with a fake profit in the earning report of 1.6 billion. Only after the bank was attacked by hedge funds and competitors in venture capital (a week before bankruptcy), investors began raiding with the withdrawal of deposits from SVB for 40 billion (over 20% of the deposit base).

Actually, this undermined the bank. The crushing collapse of investments due to rising rates could somehow be balanced through falsification of statement and the derivatives market, but it is absolutely impossible to to cover the raids for cash from the clients. So, based on this information, we could say, that default mostly was due to earnings fraud. Bank has manipulated with different assets valuation and overvalue its real price to cover loss in statement. Otherwise, with fair pricing cash withdrawals could be closed by assets selling.

By taking a bit wider outlook - SVB problems is an investment strategy for long–term fixed-yield bonds with inadequate diversification and lack of hedging. SVB, like many hedge funds, assumed that zero rates would be eternal. And I would ask you - how many more banks that are aimed on the same strategy? Since zero rates period lasts for decades, I would say, the majority of US banks (at least mid and small size) follow this strategy. In two words it sounds like "take public deposits at 0.5% and give loans, mortgages for 3-5%" and be happy. With yield rising these banks have double impact. First is, as yields start rising, they have to devalue their bonds investing by market, i.e. down. Doing this they have unrealized loss on their balance sheet. While rates still remain low and liquidity stand high - this has not bring any problem. But, with rates now are coming to 5% and Fed starts QT, they have to fight for liquidity now, providing higher deposit rates. So, their profit margin as difference between borrowing and lending is moving down do zero or even becomes negative. But this is not all yet - people start withdraw deposits and put money into US Bills with 5% yield. Where they get the cash to return deposits? Yes, they have to sell assets, but now they are with negative revaluation. So, they sell them with loss. And not all banks could hold this impact, especially if you "slightly" adjust the value of assets.

This problem is not bank-specific any more and relates to the whole sector, at least among mid and small sized banks. And here we're coming to many interesting questions. First is - could the Fed and US Treasury support SVB? No doubts. The problem was not too big. But, in this case why they have let it to fall? The answer could be only the one - they have done this intentionally. It looks like the coordinated policy of the Fed, the US Treasury and the FDIC together with the primary dealers. It couldn't be without their approval and participation. Here is practically a tracing paper with Lehman Brothers, which collapsed with the direct participation of famous people (I won't point a finger) in the Fed, the Ministry of Finance and the largest US banks. But why?

The bankruptcy of Lehman was necessary (in the role of a sacred victim) in order to create a fully controlled trigger for legitimizing the then unthinkable TARP program and asset repurchase by the Fed. I assume that the problems of SVB are not local, but global, i.e. other banks have similar gaps in the balance sheet, there will most likely be an adaptation of public opinion that it's time to put on the brakes in tightening the rate policy.

It's hard to say what their plan is now. I see two possible ways. First is - attempt to change public opinion that everybody start calling Fed for easing. This lets Fed to put responsibility on market society - they could say "see - we've tried to fight inflation and intends to continue, but they call to stop it". So, this might be the preparation of public opinion for some way of QE.

The market expected plus 0.5 percentage points at the Fed meeting on March 22, but it seems that 0.25 percentage points will become a line. It is possible a change in the Fed's tone. The question remains, how far will they go and will they somehow promote the SVB case? The collapse of SVB itself will not have an impact on the financial system, unlike Lehman, because SVB is quite isolated, but there is a secondary effect of infecting the system and undermining trust, the inevitable redistribution of liquidity from small banks to large ones. Other words speaking, US banking authorities start the programme of centralization of banking sector - collapse mid and small banks and accumulate funds in large once. The reason for that we will discuss in our Gold report tomorrow.
Second version - Fed will not stop and has let SVB collapse intentionally to crash stock market via banking sector. This version have to be considered because Fed task is of higher degree than just SVB bank. Fed has to think about debt, budget deficit and provide funds to support the bond market. The only source for that is stocks , households savings/investments and cryptocurrencies. This is vital to them to redistribute cash flows into bonds. Because if bond market collapses - nothing else will have any meaning. And in this case - Fed should stubborn keep rising the rate.

So, what particular version you think correct - share in comments. My suggestion that first scenario is more tactical. It could bring relief in short-term, starting QE again, providing liquidity and stimulate markets, but only for 3-5 months. After that inflation will explode and everything will become even worse. But, second scenario is more strategical and have long-term sense. We will get clarity on next week. If we get 0.5 Fed move with higher CPI/PPI numbers - this supports the 2nd scenario, that we're going to 6%+ Fed Fund rate and that the Fed is aimed on strategic targets. Conversely 0.25% move, even with strong CPI numbers will be in favor of coming QE and that Fed is going with the 1st scenario.

Unfortunately, recent events do not let us to make long-term forecasts on USD value. Because first scenario suggests reversal on US dollar, while 2nd one suggests lasting strength. The one thing that we definitely will get is volatility. For now I would postpone long term target set on after Fed meeting. Besides, now it is strongly depend on how other US (and EU) banks could hold the clients' pressure and massive funds withdrawal. If more banks will collapse in near term demand for the US Dollar will rise, when first effect of anticipation of Fed easing will exhaust. Actually - recent USD drop is a result of this anticipation.

Finally, there is an opinion also of the win-win answer is that it is profitable for Jerome Powell to continue his career, never be guilty of anything, and get bonuses.
This could become a time the culprit will not be Covid, not Putin and, of course, not the Fed itself, but a farce in the crypto industry. this will untie the Fed's hands for all subsequent actions, whatever they may be. A good manager is successful regardless of the success of the project. Maybe their targets are not as high as we've suggested in our two scenarios...
 
Technicals
Monthly

Despite sharp reversal, it is too small still, to make impact on monthly chart. Here picture remains bearish and B&B "Sell" still stands on the table. Recent upside action looks just minor retracement back into bearish engulfing body. The only interesting thing here is price flirting with YPP. In nearest time it will be vital, the price action around it. Technically downside breakout of YPP should become strong point in favor of downside continuation.
eur_m_13_03_23.png


Weekly

Here market can't reach major 3/8 support for 5 weeks in a row by different reasons. It difficult to foresee market reaction next week, but for now, this stands more in favor of upward continuation and possible DRPO "Sell" pattern. Especially if we get weak CPI and 0.25% Fed change - EUR could return back to 1.09-1.10 top area.

eur_w_13_03_23.png


Daily

Here situation is a bit more tricky. Despite initial upside reaction, suggested dovish Fed decision, later market has spooked massive collapse in banking sector and run into safe-haven, triggering demand for the USD. As a result, market has shown the bounce, but it is not as strong.
eur_d_13_03_23.png


Intraday

At first glance it looks difficult to make a decision, but we have the same answer on any challenge - patterns. Upside bounce was only to K-resistance area that we've mentioned on Friday. Now we could suspect appearing of Double Bottom or a kind of H&S pattern and keep an eye on support levels. In general, upside breakout of K-area and following action above 1.0840, erasing of daily AB-CD confirms our weekly DRPO "Sell" suggestion.
eur_4h_13_03_23.png


Obviously market has to stay above 5/8 support on 1H chart. 1.06 downside breakout probably suggests that fears are stronger and EUR is aimed on 1.0430 target still.
eur_1h_13_03_23.png
 
Fundamentals

Now it is difficult choice what to make a central topic of report. Initially it was suggested that Powell's speech should become the one. But, in recent few days we've got so many strong fundamental events that today it will be the problem to put them together in just one body. Because not only payrolls are worthy to be mentioned by SVB Bank collapse and few other minor things. Besides, the latter one has also important political issues, because SVB was not as large that regulators were not able to support it. So, it was done intentionally, but why? Another interesting moment is a timing of collapse. Lehman was in a nose dive for few days, even weeks. Here, SVB blowed in just 30 hours. Amazing. Big question now stands in possible chain reaction, because majority of banks have similar assets structure. And what now common people have in mind? What to do with savings, where to run? Now we have more questions rather than answers.

Political discussion we keep for gold market analysis tomorrow, because SVB crash might be the first step with far-going consequences. It is also interesting to see how your technical analysis comes to reality. Sometimes, you see something but can't explain how it could be. And then something absolutely outstanding happens that everything put on right places, as it was with our Gold analysis yesterday.

Market overview

Week has started with J. Powell speech in Congress. Markets in general, have treated it as hawkish. The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation, Fed Chair Jerome Powell told U.S. lawmakers on Tuesday.



In his testimony, Powell noted that much of the impact of the central bank's monetary policy may still be in the pipeline, with the labor market still sustaining a 3.4% unemployment rate not seen since 1969, and strong wage gains.

Demand for U.S. dollars in the currency derivative markets surged on Friday to its highest since mid-December, after a meltdown in U.S. banking stocks ignited a wave of investor risk aversion. Three-month euro/dollar cross currency basis swap spreads traded as negatively as -17 basis points , the most since December 14, reflecting a pickup in demand for hard cash. They were last trading at -14.

An index of European banks was heading for its biggest one-day fall since last June, as shares in the region's biggest lenders dropped in sympathy with a steep decline in the value of Wall Street's biggest lenders on Thursday:
View attachment 82695
U.S. labor data for February showed slower wage growth, suggesting an easing of inflation pressures may keep the Federal Reserve's pace of interest rate hikes modest and thereby reduce the greenback's appeal. The U.S. economy added jobs at a brisk clip in February, but slower wage growth and a rise in the unemployment rate prompted financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers meet in two weeks.

Congressional testimony earlier in the week by Fed Chairman Jerome Powell was seen as hawkish and strengthened the dollar as Treasuries pay more in yield than other government debt. The yield on benchmark 10-year Treasury notes fell more than 22 basis points to under 3.70% in the biggest single-day drop in four months. Bond yields move opposite to their price.



Average hourly earnings for all private workers rose 0.2% versus 0.3% in January, and lifted the year-on-year figure to 4.6%. Economists expected hourly earnings to rise 0.3% in February, which would have raised wages by 4.7% annually.
chart.png

Futures for fed funds slid to a 41% chance of a 50 bps hike when Fed policymakers meet on March 22, compared with a 71.6% probability a week ago, according to CME's FedWatch Tool.



The "quite important" consumer price index (CPI) scheduled for release on March 14 is now front and center, said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management in New York. "The focus now moves on to the CPI print and the overall financial conditions given what's happening in the banking space in the U.S.," he said.

Besides, U.S. jobless claims rose more than expected last week, raising hopes that a softening labor market will reduce the likelihood of the Federal Reserve re-accelerating the pace of its rate hikes. Initial claims for state unemployment benefits rose 21,000 to a seasonally adjusted 211,000 for the week ended March 4. Economists polled by Reuters had forecast 195,000 claims for the latest week.



Economists polled by Reuters expect consumer prices to have risen by 0.4% in February, after rising 0.5% in January:
chart.png


In EU, markets, ready and willing to take a punt on how high rates will go, have rapidly positioned for a move towards 4% by year-end. Morgan Stanley and BNP Paribas reckon this is where rates will peak. Expect ECB chief Christine Lagarde to be put on the spot on how high rates will go. Bond markets have already readjusted to a hawkish path ahead, so there shouldn't be too many surprises.

Citigroup expects the European Central Bank to hike rates by 50 basis points each in March and May to push its policy rates to about 4% by July. Economists led by Arnaud Marès said this course of action by the ECB will more likely result in overtightening of rates to tame record high inflation.
chart.png


Market sentiment has changed after SVB crash

Speaking about J. Powell testimony - In fact, Powell did not say anything new, except that inflation does not behave as the Fed leaders expected. This is not surprising — the monetary theory that the US monetary authorities adhere to (and indeed the entire American economic science) does not recognize the structural nature of the crisis and, accordingly, does not see the structural component of inflation, which we have written about many times. Just to not bother you with multiple charts of consumer spendings, GDP in different countries and others, we bring today Baltic Exchange Dry Index only. This index shows the activity of sea merchant and cargo transfers across the Globe. After short-term improvement after CV19 barriers were off, index has turned south again. In previous reports we've mentioned big drop of export - 20%+ decrease of major Exporters, such as Japan, S. Korea, Taiwan, Hong Kong and China.
image-89.png


Thus, it seems that we could say - the hypothesis about the new inflation spiral after many months of tightening monetary policy is confirmed, but we will find out for sure on next week. Still, the structural crisis continues for sure, in all countries.

Many US small banks now become victims of SVB collapse. EU banks we've mentioned above. European bank shares tumbled on Friday in the wake of a dramatic sell-off in U.S. lenders as concern spread that the sector will be vulnerable to the rising cost of money.
image-88.png




The crisis at SVB underscored the risks to banks from the end of easy money. Banks typically invest heavily in government bonds, in particular those of their home country. A spike in interest rates has led to a sell-off in bonds, leaving banks exposed to potential losses on the securities they hold. Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted U.S. rates by 450 basis points from near zero, while the European Central Bank hiked the euro zone's by 300 bps.

Other parts of Europe and many developing economies have done even more. There are concerns, however, that price inflation is staying high, something that would drive further rate hikes.



Recent moves in bond and equity markets show that investors are starting to worry that the Federal Reserve may hike rates too far, a senior fund manager at Europe's largest investor told Reuters on Thursday.

Cosimo Marasciulo, head of fixed income absolute return at Amundi, said falling market gauges of inflation expectations, equity market volatility and a deepening yield curve inversion after hawkish comments by Fed boss Jerome Powell showed the concern about a possible policy error. Strong data prints suggesting inflation will be harder to bring down than hoped for have sharply raised market bets on where rate hikes by the Fed and peers this year will end.





Near-term, Marasciulo said it makes sense to bet against the market consensus, by favouring a 25 bps move from the Fed, through trades favouring a steepening of the U.S. yield curve.

Jonathan Golub, managing director at Credit Suisse, is among those with a bleak outlook for equities. He described an environment in which persistent inflation squeezes companies’ profit margins and investors spurn stocks in favor of Treasuries and other short-term debt, where yields are at their highest levels in nearly two decades for some maturities.



Equity valuations, meanwhile, look stretched given the likelihood that rates will remain elevated, dampening future returns, wrote Nicholas Colas, co-founder of DataTrek Research, in a report this week.



Shares in leading Italian banks UniCredit and Intesa Sanpaolo fell sharply on Friday following a sell-off in U.S. and Asian banks driven by concerns lenders potentially face losses on their government bond portfolios. Banks have limited the hit to their capital reserves by classing increasingly larger portions of their bond portfolios among assets held to maturity, which prevents them from having to value them at current market prices.

However, European Central Bank Chief Supervisor Andrea Enria warned last November that "this accounting configuration gives a false sense of security in the face of shocks and volatility, in that actual changes in fair value are not reflected in the banks' earnings and regulatory capital figures."

Bank of America Chief Executive Officer Brian Moynihan said on Tuesday the U.S. economy would reach a technical recession starting in the third quarter. The bank expects three quarters of negative U.S. growth led by a corporate slowdown, with the consumer sector in good shape, he said. The bank, he said, predicted the quarterly contractions would range between 0.5% and 1%.



Conclusion:

In fact, we have to try to answer on two questions. Whether SVB bank default is a common issue and soon will spread over whole banking sector, or it is SVB - specific. Second - whether SVB collapse will lead to adjustment of the Fed policy. Speaking on the 1st subject, the roots are SVB specific. It is some life irony, because 10 days before the bankruptcy in early March 2023, at a gala concert in London, SVB was recognized as the best bank in the "Bank of the Year" nomination.

At this very moment, SVB traders have tried to restructure a hole in the balance sheet of 20 billion, having a capital of only 16 billion with a fake profit in the earning report of 1.6 billion. Only after the bank was attacked by hedge funds and competitors in venture capital (a week before bankruptcy), investors began raiding with the withdrawal of deposits from SVB for 40 billion (over 20% of the deposit base).

Actually, this undermined the bank. The crushing collapse of investments due to rising rates could somehow be balanced through falsification of statement and the derivatives market, but it is absolutely impossible to to cover the raids for cash from the clients. So, based on this information, we could say, that default mostly was due to earnings fraud. Bank has manipulated with different assets valuation and overvalue its real price to cover loss in statement. Otherwise, with fair pricing cash withdrawals could be closed by assets selling.

By taking a bit wider outlook - SVB problems is an investment strategy for long–term fixed-yield bonds with inadequate diversification and lack of hedging. SVB, like many hedge funds, assumed that zero rates would be eternal. And I would ask you - how many more banks that are aimed on the same strategy? Since zero rates period lasts for decades, I would say, the majority of US banks (at least mid and small size) follow this strategy. In two words it sounds like "take public deposits at 0.5% and give loans, mortgages for 3-5%" and be happy. With yield rising these banks have double impact. First is, as yields start rising, they have to devalue their bonds investing by market, i.e. down. Doing this they have unrealized loss on their balance sheet. While rates still remain low and liquidity stand high - this has not bring any problem. But, with rates now are coming to 5% and Fed starts QT, they have to fight for liquidity now, providing higher deposit rates. So, their profit margin as difference between borrowing and lending is moving down do zero or even becomes negative. But this is not all yet - people start withdraw deposits and put money into US Bills with 5% yield. Where they get the cash to return deposits? Yes, they have to sell assets, but now they are with negative revaluation. So, they sell them with loss. And not all banks could hold this impact, especially if you "slightly" adjust the value of assets.

This problem is not bank-specific any more and relates to the whole sector, at least among mid and small sized banks. And here we're coming to many interesting questions. First is - could the Fed and US Treasury support SVB? No doubts. The problem was not too big. But, in this case why they have let it to fall? The answer could be only the one - they have done this intentionally. It looks like the coordinated policy of the Fed, the US Treasury and the FDIC together with the primary dealers. It couldn't be without their approval and participation. Here is practically a tracing paper with Lehman Brothers, which collapsed with the direct participation of famous people (I won't point a finger) in the Fed, the Ministry of Finance and the largest US banks. But why?

The bankruptcy of Lehman was necessary (in the role of a sacred victim) in order to create a fully controlled trigger for legitimizing the then unthinkable TARP program and asset repurchase by the Fed. I assume that the problems of SVB are not local, but global, i.e. other banks have similar gaps in the balance sheet, there will most likely be an adaptation of public opinion that it's time to put on the brakes in tightening the rate policy.

It's hard to say what their plan is now. I see two possible ways. First is - attempt to change public opinion that everybody start calling Fed for easing. This lets Fed to put responsibility on market society - they could say "see - we've tried to fight inflation and intends to continue, but they call to stop it". So, this might be the preparation of public opinion for some way of QE.

The market expected plus 0.5 percentage points at the Fed meeting on March 22, but it seems that 0.25 percentage points will become a line. It is possible a change in the Fed's tone. The question remains, how far will they go and will they somehow promote the SVB case? The collapse of SVB itself will not have an impact on the financial system, unlike Lehman, because SVB is quite isolated, but there is a secondary effect of infecting the system and undermining trust, the inevitable redistribution of liquidity from small banks to large ones. Other words speaking, US banking authorities start the programme of centralization of banking sector - collapse mid and small banks and accumulate funds in large once. The reason for that we will discuss in our Gold report tomorrow.
Second version - Fed will not stop and has let SVB collapse intentionally to crash stock market via banking sector. This version have to be considered because Fed task is of higher degree than just SVB bank. Fed has to think about debt, budget deficit and provide funds to support the bond market. The only source for that is stocks , households savings/investments and cryptocurrencies. This is vital to them to redistribute cash flows into bonds. Because if bond market collapses - nothing else will have any meaning. And in this case - Fed should stubborn keep rising the rate.

So, what particular version you think correct - share in comments. My suggestion that first scenario is more tactical. It could bring relief in short-term, starting QE again, providing liquidity and stimulate markets, but only for 3-5 months. After that inflation will explode and everything will become even worse. But, second scenario is more strategical and have long-term sense. We will get clarity on next week. If we get 0.5 Fed move with higher CPI/PPI numbers - this supports the 2nd scenario, that we're going to 6%+ Fed Fund rate and that the Fed is aimed on strategic targets. Conversely 0.25% move, even with strong CPI numbers will be in favor of coming QE and that Fed is going with the 1st scenario.

Unfortunately, recent events do not let us to make long-term forecasts on USD value. Because first scenario suggests reversal on US dollar, while 2nd one suggests lasting strength. The one thing that we definitely will get is volatility. For now I would postpone long term target set on after Fed meeting. Besides, now it is strongly depend on how other US (and EU) banks could hold the clients' pressure and massive funds withdrawal. If more banks will collapse in near term demand for the US Dollar will rise, when first effect of anticipation of Fed easing will exhaust. Actually - recent USD drop is a result of this anticipation.

Finally, there is an opinion also of the win-win answer is that it is profitable for Jerome Powell to continue his career, never be guilty of anything, and get bonuses.
This could become a time the culprit will not be Covid, not Putin and, of course, not the Fed itself, but a farce in the crypto industry. this will untie the Fed's hands for all subsequent actions, whatever they may be. A good manager is successful regardless of the success of the project. Maybe their targets are not as high as we've suggested in our two scenarios...
Hi, I think currently FED main concern is to bring inflation down and by bringing home prices( inflation adjusted) down and rising rates further over 5%. So 2nd scenario for now :)
 
Morning everybody,

If we drop away all this mess in headlines and business news, in dry residual we get surprisingly calm Fed and big whales and started calls for QE. It seems that we're right in our weekend conclusion. This was planned action to first - consolidate US banking sector, second - start QE and put responsibility on small and mid banks that they are not ready for high rates.

ECB now is also shocked, because they understand - what Fed has now, they will have a bit later. Thus, ECB rate trend also could be adjusted down. In short-term, until dust still in the air, USD could drift lower a bit, especially if we get soft CPI numbers today (although I suggest it stronger).

On daily chart we have bullish trend, but mostly we follow our trading plan - watching for 1.0610 support area that should provide clarity.
eur_d_14_03_23.png


On 4H chart market is flirting with K-area and formed upside reversal swing. It means that chances to see pullback to 1.0610-1.0635 area more or less high:
eur_4h_14_03_23.png


Besides, we have unfilled gap almost in this area, which is another point in favor of pullback, maybe on CPI release moment. So, don't hurry up to buy:
eur_1h_14_03_23.png
 
Morning everybody,

So, markets stand in frustration by far, gambling on the Fed's plans on the future. 2-year US Bonds have played back all recent achievements and yield has returned to ~4.4% level up from 3.8% day before. Nomura said that it expects QT end right in March, while Citi just calls to stop QT. Now concensus suggests 0.25% rate change in March, but far standing future is still blur.

Due to so cloud background, EUR just goes nowhere and we still stand with our trading plan - watching for pullback somewhere to 1.0610 area that we've discussed yesterday.

Today we could talk about NZD. In general it shows the same direction but better patterns. For example, on daily chart we have clear H&S pattern is forming:
nzd_d_15_03_23.png


Right at the arm's bottom we have another one, minor reverse H&S that is almost ready to start:
nzd_4h_15_03_23.png


Here we could keep an eye on 0.6150 area for decision making. Although longer term perspective looks blur indeed, in shorter-term, recent US events definitely point of coming dollar weakness. So, bullish patterns have chances to work properly and reach, at least, near standing targets.
 
In my opinion FED cares more for real economy and less of financial economy and will invent various tools to patch it up. They will stop raising until fund rate is grater than CPI. So maybe next week they go 0.5%. Just my humble opinion
 
Morning guys,

So, EUR has collapsed on the back of Credit Suisse story. Now we have some relief from SNB, but residual of the problems still exists. Technically despite that we have formally bullish trend, I'm not too inspired with taking long position, especially because of the same uncompleted OP around 1.0430 area:

eur_d_16_03_23.png


On 4H chart obviously market has ignored 1.0610 support that we have intended to use as indicator. Market dropped. Despite that this was mostly due external impact, picture remains bearish. Market now starts forming widening triangle and technically direction depends on breakout.
eur_4h_16_03_23.png


Still, it seems that it is more comfortable to consider some intraday bearish trades, a kind of B&B "Sell", than to buy now against strong downside momentum. Besides, it is still a question for C. Lagarde will tell today:
eur_1h_16_03_23.png
 
Back
Top