Banking fears subside and interest rates rise again – but there is still a strong concern about inflation and a likely ever-closer recession. The bets for the next FOMC meeting are quite volatile: it is important to note that the market is already pricing in a significant drop in US interest rates by the end of the year – completely against the grain of the analysis by Blackrock, the largest asset brokerage in the world. Understand what is happening in the global financial market and how it can impact your investments.
Bank fears subsided
We are back to calm, but not completely. First Citizen bank signed an agreement with the FDIC (Federal Deposit Insurance Corporation), which guarantees customers a reimbursement of up to 250 thousand dollars in case any American bank goes bankrupt.
In the specific case of SVB (Silicon Valley Bank), the FDIC was forced by the FED (Federal Reserve Board) to assume all the obligations of the Silicon Valley Bank, regardless of the amount exceeding 250 thousand dollars. Therefore, the agreement to purchase SVB was made directly with the FDIC. After a very competitive bid, the First Citizens bank was chosen. Now, SVB account holders will automatically become First Citizens Bank account holders, according to the FDIC.
This undoubtedly reassured the market, which reacted immediately, both in futures and in FOMC bets. After all, in an alarmingly quick time, they hushed up the problem by selling SVB and Credit Suisse, with the help of local governments. This demonstrates the strong concern and responsibility of the authorities to avoid major problems in this sector, bringing greater confidence to investors.
Future interest rates rose again
American interest rates rose again this week with the expectation that the FED will no longer need to demonstrate a direct bailout to banks. Therefore, the focus is again on the biggest villain of the moment, inflation. Citi Bank said on Tuesday that the Fed is underestimating inflation and will have to keep raising rates.
The US02Y contract, which corresponds to US interest rates with a maturity of 2 years, is up 15% this week from its 6-month low, hit last week on bank fears. With this rise, we are back to trading above 4%. This upward trend in interest rate futures suggests that the market is realizing that recent events are unlikely to alter the trajectory of monetary tightening, and that, instead, they are mere indications of an impending recession.
Market expectations are increasingly volatile regarding the FOMC.
Betting for the next FOMC (Federal Open Market Committee) meeting has been wildly volatile this month, ranging from a majority bet on a 0.75% adjustment to a small but bold bet on a negative -0 adjustment, 25%. At the current time, the stakes are 59% for maintenance and 41% for a 0.25% positive adjustment at the May 3rd meeting.
Another important data to be analyzed are the bets for the end of the year. There are still six FOMC meetings left this year, in which it is possible to operate bets for positive, negative adjustments or maintenance of the American interest rate. Interestingly, the last meeting of the year, on December 13th, has the majority bet of 35% at 4.5%, which means a drop of -0.5% from the current level. Second, there is a 30% stake for year-end closing at 4.25%, which indicates a negative adjustment of -0.75%.
The most important thing to note here is the fact that the market is already pricing in a significant drop in US interest rates by the end of the year, however, this drop is not a viable option according to Jerome Powell, chairman of the FED, who has already made it clear that this possibility is not on the table.
According to BlackRock, the largest asset manager in the world, the market is wrong in its bets and may pay a high price for it. Not only because of the pessimism in relation to inflation, but also because of the declarations made by the FED and its members after the last meeting, which indicated “a new, more nuanced phase of containing inflation: less fight, but still without interest rate cuts“.
While the dollar contract (DXY) continues in devaluation, gold maintains its bullish momentum. As per last week’s overview, the XAUUSD gold contract started a lateral movement, remaining consolidated between the support at US$1,950 and the resistance at US$2,000. Within this consolidation zone, it is not possible to identify a medium/long term trend, but rather a sensitive accumulation zone, where any new indicator or extraordinary event can trigger a rapid and directional movement.