Suderman Says: Markets stabilize despite Bank stocks and interest rate uncertainty

Lingering uneasiness over bank solvency and this week’s Federal Reserve meeting worried traders overnight as Wall Street remains in an overall “risk-off” mode. Banking stocks largely led the way lower on fears of a broader contagion risk within the sector.

Wall Street wants the Fed rate hikes to stop, and to even pivot into cuts. Hitting its 2% mandated inflation rate necessitates that the Fed remain hawkish, but a pivot right now would tell us that the Fed sees enough problems within the banking sector that it must first pull-back to save that sector. The Fed has doubtless been actively assessing the health of the regional banking system over the past week, with no certainty about what it found.

Bank rescues continue

• Swiss regulators engineered a deal Sunday for UBS Group to pay $3.23 billion for Credit Suisse Group, and assuming up to $5.4 billion in losses
• They thought that the move would stabilize the industry, but instead it created more worries about the health of the Swiss banking system, and the global banking system beyond
• Liquidity support was provided for financial institutions by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank
• Banking sector risks are real, but the greater risk currently is the emotion of fear, that can sometimes do far more damage than the facts themselves
• That’s why it is essential that policymakers bring calm to the marketplace sooner rather than later, and a piece of that puzzle involves this week’s Fed policy statement

Markets stabilized ...

• At the time of writing, the broad S&P 500 index was up modestly 1%
• The VIX, Wall Street’s fear index, fell back to 24.4
• The dollar index remains under pressure as the ECB is now seen as the more hawkish than the Fed currently, with the index trading near 103.4
• Yields on 2- and 10-year Treasuries were unchanged at 3.95% and 3.46%

... and want a pause in rate rises

• The business networks continue to feature “experts” speaking to the expectation that the Fed has no choice but to pivot its monetary policy in the next few months
• Easy monetary policy is the drug of choice for the markets, which feed on stimulus money flows from both fiscal and monetary policy
• Wall Street wants a pivot, but a pivot may also communicate panic on the Fed’s part that still results in a sell-off
• The European Central Bank’s decision to proceed with its planned rate hike last week seemed to instill confidence in the market at the time
• Only the Fed knows whether it can afford to take a similar step. If so, that doesn’t mean that our problems are over
• Rising rates create credit risks for banks, corporations and for emerging countries with large amounts of dollar-denominated debt. It will take considerable time to work through the risks

Commodities fall, led by oil, on fears of weaker global demand

• Wall Street’s “risk-off” headwinds pushed commodity buyers to the sidelines thus far this morning, with crude oil prices making new 15-month lows near $64, before erasing some of their losses
• Grain and oilseed prices are mostly lower. The Ukraine grain initiative was officially extended for another 120 days over the weekend, despite the objections of Russia, easing grain traders’ concerns

China backs Russia?

• This week’s focus on the Ukraine war shifts largely to Moscow, where China’s President Xi Jinping will be the guest of Russia’s President Putin
• Several bilateral agreements are expected to be signed while Xi Jinping is in Moscow, strengthening the tie between the two leaders
• China and Russia see themselves as partners in their battle with the US and the West, and that they are prepared to set aside their differences for the common goal of coming out on top. This will translate into trade, economic partnerships, and military decisions

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com