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Worst yet to come?

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By Craig Erlam  

It was another remarkable day in financial markets and it, unfortunately, doesn’t feel like the worst is behind us.

Fear has once again gripped the markets, concerned about a repeat of past crises – one in particular, for obvious reasons – and the implications for the financial system and the global economy.

Of course, this is natural when so little is known about the Credit Suisse situation and what it ultimately means for the health of the rest of the system.

In the absence of facts, everyone is left with little choice but to speculate and frankly, what little commentary we’ve had hasn’t really helped. Quite the opposite, in fact.

Ignoring the expected comforting words from its Chief Executive, Ulrich Koerner, and Chairman, Axel Lehmann, those of its largest shareholder, Saudi National Bank, and the lack of input from the central bank and regulator have only fueled fears.

We’re now left in a situation in which stock markets have tumbled, banks around the world have been pummeled and everyone is wondering just how bad the situation is going to get. The bill may be coming due for more than a decade of rock-bottom interest rates and a massive quantitative easing experiment.

Perhaps the market reaction and all of the speculation on Wednesday were overblown, but in the absence of action or clarity from the relevant authorities, which is lacking currently, it’s hard to imagine the panic subsiding.

Perhaps the silence is evidence of them attempting to get that clarity themselves and deal with it, but I get the feeling it’s going to be a very eventful end to the week.

Against this backdrop, it’s anyone’s guess what the ECB will do on Thursday. Markets are currently anticipating a 25 basis point hike but we’ve seen how much rate expectations have changed over the last week.

And then you have to wonder what exactly would soothe market jitters? No change? Or does that suggest something deeply concerning is occurring?

Or stick to 50 and pretend like nothing is going on? I just don’t know at this point.

Oil plummets amid fears

Oil prices have been caught up in the doom and gloom of what we’re seeing in equity markets and after months of consolidation, economic concerns have triggered an aggressive break to the downside.

Brent and WTI were off around 7% on Wednesday and at levels last seen late in 2021, and it could get worse if the situation deteriorates further and evolves into a broader banking crisis.

There’s no evidence it will at this point and as such, there’s every chance oil prices bounce back, but the break of the range lows may hold unless the situation dramatically improves.

The market was previously caught between Chinese growth prospects and global economic risks and events of the last week have seen the latter dominate. ​ ​

Gold surge in risk-averse trade

Gold traded higher on Wednesday amid a flight for safety and as yields tumbled across the board once more. The yellow metal rallied even against the backdrop of a much stronger dollar, which highlights just how much risk aversion we’re seeing, particularly in Europe in response to Credit Suisse.

Unless we see a dramatic improvement in the European banking outlook, gold could eye the February highs around $1,960, with $2,000 the next big test.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.