After bank shares rose on Monday, investors’ attention has now returned to the US Federal Reserve (Fed) and how the recent bank crisis could influence tighter credit conditions, place further pressure on the financial system and, finally, enable the economy to break away from high inflation.
North American indices started higher on Monday as bank shares regained ground after a deal was made over the weekend to bail out Silicon Valley Bank.
Another pressured regional bank, First Republic Bank, saw a 23% increase. The shares of JP Morgan and other banks also rose. Shares of Wells Fargo & Company increased by more than 3%, while JPMorgan Chase & Co. shares increased by 2.5%.
The selling pressure on Deutsche Bank disappeared, and the stocks of the top German bank increased 5% on the day.
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Currently, investors are divided on the Fed’s future course of action. The Fed’s goal to cool the economy in order to prevent inflation from remaining high may be accomplished by tighter credit conditions, caused by the pressure on the banking sector. This could result in pressure on the economy as a whole and accelerate the economic slowdown.
As a result, the Fed is once again faced with the choice of hiking interest rates once again or leaving them unchanged at its meeting in May. The probability of a pause in rate hikes is heavily favoured in the futures market despite the fact that the Fed hinted at another rate hike this year.
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The European Central Bank (ECB) is in a similar position to the Fed, even though there are more voices in favour of further interest rate increases at the ECB due to higher inflation in Europe than in the US and the fact that they started raising rates later than the Fed.
Analyst predictions for the currency market, therefore, predict a stronger EUR/USD.
The pair has returned to levels near 1.0800 after falling due to the uncertainty caused by the collapse of the Deutsche stock, with a closer technical goal in the vicinity of 1.0900.
Sources: Bloomberg, Reuters