By Craig Erlam
Stock markets bounced back on Tuesday as some calm returns following the UBS takeover of Credit Suisse and traders look ahead to the Fed on Wednesday.
It’s been a wild couple of weeks and while many are hopeful the worst is behind us, I can’t say I’m particularly confident.
The response to recent events has been impressive from central banks, regulators and governments, and while we can commend them for their firefighting skills, only time will tell if they’ve been successful in extinguishing the flames.
But markets are clearly comforted by the measures put in place to prevent a full-blown banking crisis. If this can be followed by a few days of calm with no other banks emerging as being at risk of collapse without major intervention, stock markets could continue to recover.
At the same time, I would expect interest rate expectations to rise as the risk of imminent contagion and recession decrease. I’m not sure they’ll quite revert back to where they were as investors and central banks will be bruised by events of the last couple of weeks and perhaps a little more cautious for now.
That adds another layer of intrigue to the Fed decision that stretches well beyond whether it hikes by 25 basis points or not. The messaging will be crucial and could be a major driving force in markets, barring further upheaval in the banking sector.
Will economic fears fully abate?
Oil prices rose again on Tuesday, adding to Monday’s recovery to trade more than 6% from the lows.
Brent fell close to $70 on the first day of the week, the lowest level since late-2021 in a sign of how much the banking crisis has reverberated throughout markets. Contagion risks recession and that means much weaker demand, although there is more than one side to that equation when it comes to the price of oil.
Either way, it’s bouncing back alongside risk appetite and it will be interesting to see where it settles. It traded within a wide range from early December to last week and there’s no guarantee it will just fall back into that again if the dust settles.
Gold paring gains ahead of the Fed
Gold is pulling back for a second day, paring gains as some calm returns to markets and yields move higher.
It’s performed extremely well over the last couple of weeks, aided by a sharp decline in bond yields, a softer dollar, and a dash for safety, so it makes sense that it’s giving some of that back.
The first test of support falls around $1,960, near the early February peak, although if sentiment continues to improve, that may not hold for long.
That said, it won’t take much for risk aversion to return and then there’s the Fed on Wednesday which could have a big impact, depending on how hawkish it chooses to be.
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.
