• Banking sector in turmoil
  • Central banks stay the course;
  • Chinese economy shows signs of recovery

The spring has already started and with it comes the hope for calm after a chaotic 2022 that included the war, the energy crisis, soaring inflation and the fastest global central bank tightening cycle in decades. Not this March, though, as the turmoil in the banking system has knocked the confidence on the economic situation off‑the‑track and urged the market participants to re‑assess their projections, once again.

Mainly thanks to the concerns about the banking sector, the financial markets have been shaken over, but managed to recover till the end of the month, resulting in a 0.6 % increase of the MSCI World index (EUR). Better results were shown by the emerging markets stocks’ gauge MSCI Emerging Markets index (USD) that gained 2.7 %.

Banking sector under pressure

In the wake of the shock from the Silicon Valley Bank and Signature Bank (among others) failures, the primary focus is on the rest of the banks as investors evaluate the vulnerability of the banking system. The announcement that all depositors at the two banks will receive full reimbursement, alongside the Federals Reserve’s (Fed’s) newly formed bank lending program to provide funding for deposit‑taking institutions, provides a foundation of confidence in the stability of the banking system. Despite this, it is not yet certain that the situation is resolved as it will take time for the dust to settle before any secondary effects on the banking system can be accurately assessed. As a result, we have seen the financial sector, and particularly US regional banks, substantially underperform the broader market this year.

Financial sector has sharply underperformed the S&P 500 Index

Source: Bloomberg LP

Central banks grapple with new obstacles

As expected, in the last meeting the Federal Reserve raised interest rates by 0.25 %, bringing the Fed funds rate to 4.75 % – 5.0 %. During the meeting, the Fed delivered two messages that were equally important: one focused on combating inflation, while the other was centered around offering assistance to address the instability in the banking sector. Regarding inflation, the Fed is still using its monetary policy tools to decelerate economic activity. Some members of the board believe the Fed may be closer now to the end of its tightening cycle. On the banking crisis, the Fed is prepared to employ its liquidity tools as necessary to provide support for the banking sector. This may include emergency lending and increasing the flow of funds to enhance the liquidity. In any case the Fed maintains its belief that the US banking system is strong and capable of withstanding the challenges.

In the middle of the month, we also saw the European Central Bank (ECB) raising rates by 0.50 % and noting they would remain data‑dependent when determining the path of the rate hikes going forward. However, the recent turmoil in the financial markets has made the path ahead less certain. The Bank of England pushed ahead with another 0.25 % interest rate increase, as well, focusing on its ongoing inflation battle.

Chinese economic data shows recovery

According to the Chinese economic data, there are indications of a recovery, as industrial output has increased by 2.4 % from the previous year. However, this is slightly lower than the anticipated rate of 2.6 %. Chinese authorities have committed to provide extra liquidity to support economic expansion. After lifting strict COVID‑19 restrictions at the end of the last year, Chinese authorities have reopened the economy, enabling consumers to travel and re‑commence spending on services (Retail sales rose 3.5 % in January and February compared to the same period last year), while also adding to the manufacturing capacity. Moreover, China has encountered remarkably low inflation levels and policymakers are likely even trying to prevent the deflationary pressures. That posts the contrasting picture, as the inflation across most of the world has been far higher than policy makers are comfortable with.

House View update

In response to the ongoing market volatility, we are taking a wait and see approach in this turbulent environment. We decided to retain the neutral risk allocation budget, while closely watching the latest developments. Overall, instability and defensive posturing may persist for a while, as the confidence in the banking sector may take time to fully return.

Luminor House View



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