Volatility Hits Global Trading With Banks in Focus: Markets Wrap

A renewed bout of volatility gripped markets around the globe, with concern about financial stability fueling bets that major central banks will need to stop raising rates amid growing recession jitters.

(Bloomberg) — A renewed bout of volatility gripped markets around the globe, with concern about financial stability fueling bets that major central banks will need to stop raising rates amid growing recession jitters.

Equities traded off lows after assurances from authorities about the financial sector, while a gauge of regional banks pushed higher. Deutsche Bank became the latest focus of the turmoil as concern about the industry sent its shares slumping the most in three years, while Bloomberg News reported that Credit Suisse and UBS are among the firms under scrutiny in a US probe into whether bankers helped Russian oligarchs evade sanctions. 

Treasury Secretary Janet Yellen was set to convene the heads of top US financial regulators Friday for a previously unscheduled meeting of the Financial Stability Oversight Council. European Central Bank President Christine Lagarde told European Union leaders that the region’s banking sector is strong, according to people familiar with the matter. 

Treasuries sank to the lowest levels this year and German two-year rates tumbled over 30 basis points. US swap rates linked to policy meeting dates completely abandoned wagers on a May rate increase and ramped up bets on rate cuts beginning in June — even as Federal Reserve Chair Jerome Powell said that cuts are not his “base case.” For the ECB and the Bank of England, traders no longer price in an additional quarter-point rate hike.

Earlier in the day, Fed Bank of New York data showed a gauge of US inflation activity slowed to 4.75% in February, the lowest reading since 2021. The report came before Fed Bank of St. Louis President James Bullard said that he raised his forecast for peak interest rates this year to amid ongoing economic strength — based on an assumption that banking-sector strains will ease.

As observers tried to explain the Deutsche Bank plunge that unsettled the financial world Friday, analysts at Citigroup Inc. said it may be down to an “irrational market.” While that’s a concern in itself, even more worrying is the risk that negative views spiral out of control and become a self-fulfilling prophecy.

“Confidence is fragile, market volatility is likely to stay high, and policymakers may have to go further to make sure faith in the global financial system stays solid,” said Mark Haefele, chief investment officer at UBS Wealth Management. “Financial conditions are also likely to tighten, which increases the risk of a hard landing for the economy, even if central banks ease off on interest-rate hikes.”

A Fed facility that gives foreign central banks access to dollar funding was tapped for a record $60 billion, in a week of banking stress that has roiled markets. The demand came through the institution’s Foreign and International Monetary Authorities Repo Facility and encompasses the week through March 22. The Fed didn’t provide information on who accessed the funding.

Banks are often in the frontline when recession fears grow as they are the channel through which credit flows through the economy.

Read: Bond Traders Bet Fed Will Cut Rates by June as Bank Stress Grows

Jeffrey Gundlach, DoubleLine Capital LP’s chief investment officer, sees the Fed cutting rates “substantially” soon, according to posts on Twitter. He also warned of “red alert recession signals” emanating from the US yield curve.

Investors are fleeing to cash in the biggest rush since the onset of the pandemic as concerns of an economic slowdown mount, according to Bank of America Corp. strategists who see equity and credit markets slumping in coming months.

“Credit and stock markets too greedy for rate cuts, not fearful enough of recession,” a team led by Michael Hartnett wrote. The strategist, who was correctly bearish through last year, said investment-grade spreads and stocks will be taking a hit over the next three to six months.

Global cash funds had inflows of nearly $143 billion, the largest since March 2020 in the week through Wednesday — adding up to more than $300 billion over the past four weeks, according to the note citing EPFR Global data. Money market funds assets have soared to more than $5.1 trillion, the highest level on record. Prior surges coincided with large Fed interest rate cuts in 2008 and 2020, Hartnett said.


Some of the main moves in markets:


–With assistance from John Viljoen, Vildana Hajric, Isabelle Lee, Peyton Forte, Angel Adegbesan and Carly Wanna.

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