Global Markets Update Monday, 27 March 2023

Policymakers on both sides of the Atlantic struggled to reinstate confidence in the banking system. European Central Bank (ECB) president Christine Lagarde said the banking sector was “strong” and that the ECB was fully equipped to provide liquidity to the euro area financial system if needed. US Treasury secretary Janet Yellen said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits.

Economists are now anticipating the Fed will pause its rate-raising cycle, keeping rates on hold at its next meeting in May before cutting rates in September. In Europe, expectations are for a 25-bps increase at the next ECB meeting and no cuts in 2023.

The FTSE 100 gained 1.0% over the week.

The Bank of England raised rates by 25 bps to 4.25% but said it no longer predicted the UK economy would fall into recession in 2023.

UK inflation unexpectedly jumped to 10.4% in February due to a rise in the cost of fresh fruit and vegetables.

The S&P Global/CIPS UK composite purchasing managers’ index (PMI) fell to 52.2 in March from an eight-month high of 53.1 in February. Activity in the services sector slid to 52.8 from 53.5 in February, while manufacturing output fell to 48 compared with 49.3 in February.

UK retail sales unexpectedly surged 1.2% over the month of February, following an upwardly revised 0.9% rise in January.

The S&P 500 rose 0.9% over the week while the tech-heavy Nasdaq rallied 1.4%. Speculation that the Fed may not raise rates as much due to the banking crisis has provided a boost to high-growth companies in particular.

The US Federal Reserve raised rates by 25 bps, taking them to a range of 4.75%-5.0%, but omitted its reference to the need for “ongoing” rate rises. The Fed said the US banking system was “sound and resilient” but added that it was not yet clear to what degree the tighter credit conditions likely to stem from the collapse of Silicon Valley bank and Signature Bank would restrict the economy and inflation.

The S&P Global US services PMI surged to 53.8 in March. Meanwhile, the manufacturing PMI increased to 49.1 in March from 47.3 in February, the smallest contraction in the current five-month sequence of falling factory activity.

US durable goods orders dropped 1% over the month of February.

The Eurofirst 300 increased 1.0% over the week.

The S&P Global eurozone composite PMI rose to 54.1 in March from 52 in February, the fastest expansion since May 2022. The services PMI rebounded to 55.6 in March from 52.7 in February and the strongest expansion since last May. However, the manufacturing PMI fell to 47.1 in March from 48.5 in February.

The S&P Global Germany services PMI rose to 53.9 in March from 50.9 in the previous month, marking the fastest pace of expansion since May 2022. However, manufacturing activity fell to 44.4 in March from 46.3 in February.

The Swiss National Bank raised rates by 50 bps to 1.5%. Norway’s Norges Bank raised rates by 25 bps to 3.0%.

The enforced merger of Credit Suisse and UBS had led to bondholder protests over the treatment of Credit Suisse’s Additional Tier 1 (AT1) bonds. Usually bondholders rank before shareholders in the event of a liquidation but the Swiss regulator Finma prioritised shareholders over the holders of AT1 bonds.

Deutsche Bank said it would redeem $1.5 billion in a set of tier 2 notes due in 2028 as the cost of insurance against a default in its debt surged to the highest since they were introduced in 2019.

The Nikkei 225 edged 0.2% higher over the week.

Emerging Markets
The MSCI EM Index jumped 3.8% over the week in USD terms.

The yield on the 10-year US Treasury fell 4 bps to 3.37% over the week, having briefly traded below 3.3%, its lowest since September 2022. The yield on the two-year note closed the week 19 bps lower at 3.76% amid speculation that the Fed’s latest rate rise may be its last.

The yield on the 10-year German Bund rose 2 bps over the week to 2.12%.