• Calmer tones return to global markets after weekend banking deal

• Stock markets edge higher, gold loses some of its safe-haven appeal

• Major currencies trade in narrow ranges, except for the Japanese yen

Markets in better mood

A sense of calm has returned to global markets after a double-barreled dose of good news on the US economy and financial sector. Renewed concerns around the durability of the banking system plagued trading on Friday, with bank shares in Europe getting battered as fears of contagion spread.

Yet, the mood improved once the latest US business surveys rolled out. These surveys painted a brighter picture of economic conditions, praising the resilience of demand in the services sector and highlighting a reacceleration in inflationary pressures. Similarly, business leaders did not appear particularly concerned about the impact of the banking episode on their operations.

This was the catalyst for a miraculous comeback in stock markets, with the S&P 500 erasing some heavy losses to close higher by 0.5% in the end. Futures point to further gains when Wall Street opens on Monday, reflecting some relief that no other banks collapsed this weekend.

Beyond the absence of escalation, the news flow around banks has started to improve too. Investors were greeted on Monday with headlines that First Citizens Bank will absorb the deposits and loans of failed Silicon Valley Bank, signaling that regulators are working round the clock to prevent any further spillovers.

Big picture for stocks 

Knowing the events of this tumultuous month in advance, it would be difficult to guess that the Nasdaq 100 would be trading 6% higher, exhibiting teflon-like qualities. After all, gloomy economic news is ultimately negative for corporate earnings, and by extension for equity markets themselves.

Instead, it was a classic case of ‘bad news is good news for stocks’ because the Fed will ride to the rescue. The turmoil in banking has convinced investors that interest rates have likely reached their peak already, and that rate cuts will be back on the menu by summer. That’s a powerful elixir for riskier assets, hence why tech shares have been flying high.

The problem is that valuations, especially in tech, have started to reach exorbitant levels again. Speculation for rate cuts and increased liquidity into the financial system are fantastic news for equities, but at some point, it’s just difficult to justify these valuations heading into what will likely be an earnings recession starting this quarter. The risk/reward seems poor.

Gold inches down, currency space quiet

Gold has turned into a barometer for financial stress this month, reflecting the degree of concern around the banking debacle, mostly because of its sensitivity to interest rate expectations. With widespread fears that the banking sector has reached a breaking point, there’s been a dramatic decline in US yields that has turbocharged the non-yielding precious metal.

Whether this rally is sustainable though, will ultimately depend on how the financial system fares and whether the Fed rate cuts that have been priced in for this year truly come to fruition. As things stand, ‘peak stress’ seems to have passed, so there’s a risk of a retracement after this fierce rally in gold. 

Crossing into the forex arena, things are awfully quiet early on Monday. Most major FX pairs are trading in narrow ranges as investors search for the next theme that will drive sentiment. The only ‘serious’ moves were in the yen, which fell across the board as banking nerves receded and US yields staged a minor recovery.

There isn’t much on the agenda for today. Investors will continue to monitor banking news, assessing its implications for the stance of central banks and the real economy.