Daily Market Outlook, March 20, 2023

Banking Turmoil Persists Leaving Investors Cautious

Asian equity markets have started the week in the red as markets digest the emergency acquisition of Credit Suisse by its Swiss counterpart UBS, in a weekend emergency government brokered deal, UBS are acquiring the beleaguered Credit Suisse for CHF 3bln which will eradicate CHF 16bln of additional tier one bonds. The Nikkei 225 was the Asian posterboy for banking sector stress given the BoJ’s Summary of Opinions provided little in the way of additional information to markets, it is also noteworthy that the BoJ’s USD overnight funding operations had no bids suggesting little real stress evident in the system. The Hang Seng and Shanghai Comp have also seen softness with the tech heavy Han Seng the standout underperformer, printing losses in excess of 3%, while the Shanghai Comp was supported by Friday’s RRR cut by the PBoC in an effort to boost liquidity and support the economy, however, the central bank opted to maintain its benchmark lending rate at 3.65%.

While the markets main focus remains the turmoil in the banking sector, investors will have one eye on central bank activity this week as officials face the conundrum of balancing inflationary concerns with recent market volatility pressures and the likely implications for economic activity and the appropriate response for monetary policy. Just over a week ago markets were aggressively pricing the potential that the Fed would use this week’s policy update to signal a re-acceleration in the pace of interest rate increases by hiking by 50bps rather than repeating the 25bps rise seen in February, with further indications of the potential for a higher terminal rate for this policy tightening cycle, however, given recent market turbulence, investors are now pricing a 25bps hike with the potential for significant rate cuts by year end, which marks a stark reversal in market sentiment. Interest rate expectations have also retreated in the UK and the Eurozone although in the case of the European Central Bank, rates are still priced to move higher from current levels by the end of 2023 Interest rate expectations have proved to be very volatile so far this year with this current move representing the second meaningful shift in expectations.

The data docket is somewhat scant today leaving market action to be driven by headlines around the banking turmoil as investors eye rate decisions from the FOMC, Wednesday and Bank of England on Thursday, comments from ECB President Lagarde later may provide additional colour into the ECB Chief's perspective on the Eurozone rate path given the current market uncertainty.

FX Options For 10am New York Cut

EUR/USD: 1.0600 (705m) 1.0665 (825m) 1.0705(1.0b)
USD/JPY: 133.00 (1.2b)
AUD/USD: 0.6775 (1.2b)
Option risk reversal contracts increased their implied volatility premiums for USD calls versus EUR, GBP and AUD, while USD/JPY risk reversals increased their JPY call/USD put premium to flag the most vulnerable FX directions.(RTRS)