The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation.
US equities ended their worst week so far this year on Friday with a fourth straight day of losses, and US Treasuries and gold soared in a flight to quality after federal regulators closed tech-focused lender Silicon Valley Bank on Friday in the biggest US bank failure since 2008. Regional bank equities plunged, with the top S&P regional banking ETF sinking 16% on the week, it’s worst showing since March 2020 at the start of the pandemic. The turmoil in bank shares overshadowed the February jobs report, which offered some hints that inflation may be easing, as employee wages increased less than expected. For the week, the Dow Jones average fell 4.4%, the S&P 500 slipped 4.5%, and the Nasdaq Composite lost 4.7%. This contrasted with losses of 1.9% in the Euro Stoxx 50 index which widened its outperformance on US markets for the year.
Summary as at 13.03.2023
- Asian equity markets were mixed on Monday as investors remained cautious about further systemic risk following the collapse of Silicon Valley Bank, though US regulators announced plans to backstop depositors and provide a new lending program to financial institutions. Shares in Australia and Japan fell, while Hong Kong and China equities rose on positive signs of policy continuity.
- European shares are set to rise, and US equity futures are set for a strong open as traders assess the US government’s efforts to support the financial sector following SVB’s collapse.
- Oil prices ticked up in Monday Asian late morning trade, reversing a week’s start as a recovery in Chinese demand and a weaker US dollar provided support to a market rattled by the prospect of possible further US interest rate increases.
- US authorities raced on Sunday to stem jitters about the health of the nation’s financial system, pledging to fully protect all depositors’ money following the collapse of Silicon Valley Bank while also giving any bank squeezed for cash easier terms on short-term loans.
- China must redouble efforts to ensure stability and bolster self-reliance, President Xi Jinping told lawmakers in a speech to mark the start of his precedent-breaking third term. He also vowed during the closing of the annual National People’s Congress on Monday to oppose foreign interference in Taiwan, a veiled reference to increasing American support for the democratically elected government in Taipei.
- Less than a week after Federal Reserve Chair Jerome opened the door to a re-acceleration in the pace of interest-rate hikes, traders slammed it shut again amid the sudden eruption of financial strains at the US regional bank level. Economists led by Jan Hatzius at Goldman Sachs said they no longer expect the Fed to deliver a rate increase next week, citing “recent stress in the banking system.” Treasury two-year yields dropped 25 basis points to 4.34%, heading for their steepest three-day decline since October 1987, when the Black Monday equities rout stunned markets.
- The US economy unexpectedly created 311k jobs in February, well above market forecasts of 205k, and following a downwardly revised 504k in January. Still, the same report showed the unemployment rate rose to 3.6% last month while wage growth slowed, easing some worries that a still-tight labour market will prompt sharper interest rate hikes.
- The week ahead will be busy in terms of data with the inflation report in the US and retail sales data taking a central stage. Investors will be also looking for any signs of contagion in the financial sector from the fallout of Silicon Valley Bank. Elsewhere, the ECB will decide on the course of monetary policy and China will publish data on industrial production and retail sales. Finally, the unemployment rate will be released in the UK and Australia.