Headlines

* Great hiking cycle seen as done as yields drop below cash

* US expected to report strong consumer price increases in February

* Gold jumps to highest since early February as yields crash

* Asian stock benchmark erases 2023 gains as bank rout extends

FX: USD fell against all of its peers as markets priced in rate cuts in the wake of SVB’s collapse. The DXY trades with a 103 handle as money markets price rates to peak in a few months. The US Treasury 2-year yield posted its biggest one-day decline since the aftermath of 1982. This was a bigger drop than during Black Monday in 1987. Longer-dated yields didn’t fall as much, lessening the inversion of the US Treasury yield curve. In fact, it was the sharpest steepening in the US 2-year/10-year yield curve in the last 40 years, apart from the price action on 9/11 in 2001.

EUR moved up to its 50-day SMA at 1.0724. ECB sources noted that the bank’s hawkish plans are set to face bolder opposition amid the SVB fallout. GBP enjoyed its fourth straight day of gains to a high of 1.2199. UK jobs data released this morning remained steady with earnings cooling modestly to 6.5% y/y.  USD/JPY sunk to a four-week low of 132.27 before rebounding. Haven flows and plunging yields have boosted the yen. AUD popped up to a high of 0.6716 before pulling back. Weak consumer and business confidence surveys were released out of Australia earlier. USD/CAD fell to a low of 1.3677 after topping out at 1.3862 on Friday.

Stocks: US equities were relatively assured thanks to much lower bond yields and as bank shares plunged. The blue-chip S&P 500 lost just 0.15% after a volatile day. It remains below key resistance including the 200-day SMA at 3939. The tech-heavy Nasdaq 100 closed higher by 0.81%. The Dow finished lower by 0.28%. The KBW Nasdaq bank index fell 11.7% with regional banks plummeting the most. Investors worried about smaller lenders and their fragile balance sheets. It is now only the third decline of more than 25% in a week for the index of big US banks in 31 years. The other times were during Covid and post the Lehman bankruptcy in 2008.

Asian stocks declined with risk sentiment low and selling in financials. The Nikkei 225 slumped due to heavy losses in financial stocks. They took up the 10 worst performers on the day.

US equity futures are positive as investors await the incoming US CPI data. European equity futures are pointing to a slightly better open. The Euro Stoxx 50 cash market closed down 3.1%.

Gold has climbed over 5.7% in four days. It is holding onto the $1900 psychological level.

Day Ahead – Incoming US CPI hits market unrest

Records were hit in some markets yesterday, primarily in bank stocks and money markets. The dovish repricing in central bank curves has been historic as markets (over?)-price in rate cuts and the end of the tightening cycles. Whether this lasts depends on if the banking crisis is contained over the next few days. For the time being, market stress indicators are high and warrant attention. But other parts of the market are functioning fairly normally in the circumstances.

We get what has been the biggest data point on the calendar later today. Consensus forecasts the m/m US CPI to rise 0.4% for both the headline and core prints. This is still clearly above what is needed to bring annual inflation back to target at 2%. That means it supports further rate hikes, in normal times. But currently, the market is 60/40 as to whether the Fed hikes by 25bp or doesn’t raise rates at all next week. After March, the market is discounting cuts starting with at least a 25bp move from July. Hot inflation will temper this pricing, but contagion (or not) is the key word over the next few days.

Chart of the Day – Gold jumps higher

Gold has seen strong safe-haven demand since Friday as the SVB blow-up has led to concerns about the banking sector. Two of gold’s main drivers, the dollar and treasury yields especially have seen sharp falls. Together with technical levels being broken and hedge funds holding a much-reduced long position, the market managed to touch $1914 yesterday.

The precious metal should likely benefit from continued worries about the financial system, increased recession worries and a swap market now pricing in just one rate hike ahead of a rate cuts. We are mindful of this pricing changing sharply if the volatility clams. Support sits at $1878 and $1858. Holding above $1900 is needed to signal a reversal of the February correction.