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Optimism seems to be settling in the markets

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Miguel A. Rodriguez
Miguel A. Rodriguez
22 March 2023

Swift actions taken by bank regulators over the last couple of days are finally seen to be having an impact on market confidence. Now the big question is whether the US Federal Reserve (Fed) will take a more dovish stance when it comes to interest rates, or if it will follow the European Central Bank’s (ECB) lead.

Leading indices in the US and Europe increased yesterday as a result of the Credit Suisse bailout calming concerns about a potential new banking crisis. The market’s improved performance was also supported by the announcement that the major North American banks may be considering the possibility of investing all or a portion of the $30 billion they had deposited in First Republic bank in the bank itself. This was said by the CEO of JP Morgan, Jamie Dimon.

Fears of a banking sector-wide spillover have decreased because of the Swiss state-backed acquisition of Credit Suisse by UBS and the actions taken by central banks to increase liquidity, but still some worry that the crisis is still far from over remains.

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At a time when investors are more optimistic about the banking situation after the swift intervention of the authorities, US Treasury Secretary, Janet Yellen, said that more measures may be required to protect bank depositors if smaller institutions experience deposit withdrawals. 

The current banking situation has also made investors expect the Fed to be a little more dovish in its actions. In fact, according to market expectations, the Fed may hike interest rates by 25 basis points today, which is half of what was anticipated prior to the banking crisis brought on by Silicon Valley Bank.

Similar to the European Central Bank (ECB) a week ago, the Fed will now face a challenge during its meeting today. If the central bank decides not to raise interest rates further, the market may view this as a warning sign. However, given the current state of the financial system’s strain, it may not be a good idea to raise rates by 50 basis points as this might put other regional banks in a similar predicament to Silicon Valley Bank.

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In any event, it will be crucial to understand the Federal Open Market Committee (FOMC) members’ forecasts, which will also be revealed along with the dot plot today, as well as the speech by Fed Chief Jerome Powell. Analysts expect there to be a shift towards more dovish monetary policy.

Given these possibilities, the stock market indices maintained their upward trend from the previous day, with First Republic bank having a standout performance by rising more than 40%, a day after the news that major North American banks were considering the possibility in investing in the bank. 

 

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Sources: Bloomberg, Reuters

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.