The mad weekend, which
left markets handing from the edge of the banking crisis in the United States,
ended on Monday with an optimistic note when the Federal Reserve (Fed) and the
U.S. Ministry of Finance announced the availability of direct loans to banks
under the Federal Deposit Insurance Act to cover uninsured deposits at Silicon
Valley Bank (SVB) and Signature Bank (SB) that collapsed last week. The Fed and
Federal Deposit Insurance Corporation (FDIC) said they will cover deposits
under $250,000, which is a maximum limit per authorized deposit, and other
accounts.
This is a very
unexpected generous act for the United States, which may reveal that the
troubles of SVB and SB are only the top of the iceberg. The collapse of these
two important banks in California has put the American banking system under
major stress which was lastly felt during the fallout of the Lehman Brother
collapse in 2008 and which lead to the Great Financial Crisis in 2008-2009.
Investors are expecting the economic turmoil to reach almost the same magnitude
this time. So, the collapse of SVB and SB made investors shiver as it has many
similarities to the Lehman Brothers case. When the Fed and FDIC announced
unprecedented actions to cover authorised deposits, investors gave out a sigh
of relief. They also revised their expectations of the Fed’s actions. They now expect
the Fed will only raise its interest rates by 0.25 percentage points to the
rounded 5.0% instead of 0.50 p.p. previously expected . Goldman Sachs is no
longer expecting an interest rate hike in March despite very hawkish statement
from the Fed’s frontman, Jerome Powell, during his testimony to Congress last
week.
So, it will be vital
to monitor U.S. inflation figures that will be released on Tuesday. Will the
Fed swallow its pride and allow inflation to run high while considering the risks
of elevated interest rates for the national banking system even in a slowdown
of inflation, that would be less than the expected 6.0% year-on-year for
February.
This may seem like a
paradox, but the only solution for the Fed now is a collapse of the stock
market which will shockingly bring down inflation to allow the monetary
watchdog to pause interest rate hikes, or even reverse them. Further increases
of interest rates will likely suppress the American banking system. So, we may
expect stocks to collapse within the nearest two weeks.
Technically,
the S&P 500 index continues to move within a downside formation with
targets at 3650-3750 points. The index is below the strong support level of
3970-3990. This opens the window for a steep decline towards 3650-3750 points
and below.
Oil market
prices dropped significantly to the low margin of the wide trading range of
$79-89 per barrel of the Brent crude benchmark. This time prices are ready to
go deep down once they breakthrough the support level of $79 per barrel.
Recession logic suggests that prices may decline towards $40-60 per barrel.
Gold prices
are moving inside the mid-term, upside formation with targets at $2000-2100 per
troy ounce by the middle of 2023. Prices jumped to the resistance level of
$1890-1900 per ounce amid shocking quake in the U.S. banking system. If prices
fail to go above $1900 per ounce this week, a new testing of the support at
$1790-1810 per ounce will be possible. If this level is crossed, prices may
rewrite last year’s lows of $1600-1650 per ounce.
The U.S.
Dollar is likely to continue strengthening, but it will largely depend on
incoming inflation data. Considering high volatility in the market, it is
better to place orders attached to longer perspectives. Short trades for EURUSD
opened at 1.06700-1.07200 with a downside target at 5000 points below the
opening level and the same 5000 points for a stop-loss order should be
considered attractive. The decline of the EURUSD to 1.05000-1.05500 could be
used to close half of the trade, and the other half should be continued until
the targets of 1.03000-1.03500 are met.