It’s been another lively start to the week following a busy weekend in which Swiss authorities have been working tirelessly to complete the sale of Credit Suisse and avoid further fallout on the open.
So far it looks as though those efforts have not been in vain, along with those of a selection of major central banks to ensure access to dollar funding continues. This is now the second weekend that central banks, governments, and regulators have spent putting out fires, and, while markets are recovering today, I’m not sure anyone is confident that all flames have been extinguished.
That said, the speed and decisiveness with which authorities have acted over the last couple of weeks will be providing some reassurance amid all of the uncertainty. There really is no time to waste in these situations and while there will be time to assess what could have been handled better in the future, the important thing now is that investors can move on, even if to determine where the next vulnerability lies.
What this episode has done is force central banks and investors to question whether the previous path for interest rates is still warranted. The pace at which interest rates have risen around the world was always likely to cause problems and central banks must now evaluate whether the costs still outweigh the benefits.
They may well decide that they have the tools available to address financial stability concerns that don’t interfere with their price stability mandate and, as the ECB did, stay the course. But then, the Fed was much closer to the terminal rate than the ECB and may have more room to maneuver as a result.
Either way, their jobs have just become that much more difficult and the risks of every policy move greater. Given the lags of monetary policy, the final stages were always likely to be the most painful and the next few months could very much see that prove to be true. At the very least, investors will be on high alert for further signs of turbulence.
Oil seeing some support
The sell-off in oil markets appears to be running into support following the near-20% decline over the last couple of weeks. Traders have been forced to reassess the outlook for the global economy in light of recent issues in the banking sector and it would appear they’re no longer so optimistic.
That may of course change as things settle down, assuming they do in the short term, but for now, they’re taking a far more cautious stance. Brent saw support around $70 and in recent days has bounced back strongly from early sell-offs, which could suggest a rebound is on the cards.
Record highs in sight?
Gold traded above $2,000 for the first time since March last year and only the fifth day ever earlier, a move that will get traders talking about the prospect of record highs in the not-too-distant future. The yellow metal has been buoyed by lower yields, a softer dollar, and a flight for safety over the last couple of weeks.
The next test of its bullishness may come Wednesday and perhaps not from the rate decision itself but what Powell and his colleague have to say on the path forward. His counterpart at the ECB opted to remain tight-lipped on future moves and a similar approach from the Fed could see gold spike once more.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
