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Daily Market Comment – Stocks headed for quarterly gains despite turmoil, dollar set for losses

  • Equities to end week and quarter in buoyant mood as tech-led rebound gathers pace
  • Fed speakers keep rate hike door wide open, dollar firms but still down in Q1
  • Tokyo CPI beat unable to halt yen’s slide, US and Eurozone inflation coming up next

Stocks shrug off banking mess as turbulent quarter closes

Equity markets may have taken a strong knock from the banking crisis, which sprung out of the blue earlier this month, but the speed at which they have bounced back is probably just as surprising, as they are well on their way to ending the quarter with solid gains.

Much of the rebound is being led by technology shares, particularly the big tech on Wall Street. There’s been a notable divergence between the Nasdaq Composite and Nasdaq 100 since the SVB-induced selloff, as the pandemic darlings such as Apple and Microsoft have seen their defensive appeal come back into play.

In contrast, smaller tech rivals have been struggling due to fears of a liquidity crunch as banks in the US will likely tighten their lending standards in response to the recent collapses and bailouts of regional banks.

The Nasdaq 100 closed at its highest since August 2022 on Thursday and is up more than 18% in the year to date. The Nasdaq Composite is up just under 15% and is yet to surpass its February pre-crisis peak. The S&P 500’s gains are even more modest at about 5.5%.

Bank stocks came under pressure again yesterday after President Biden called on US regulators to tighten the rules to prevent a repeat of the SVB episode, proposing several measures that could be implemented by bypassing Congress.

Fed rate path steepens slightly after remarks

However, whilst some significant vulnerabilities remain, not just within the financial sector but in the wider economy as well should credit conditions tighten in the coming months, overall sentiment is being propped up by dovish Fed bets. The expectation that the Fed and other central banks won’t be raising rates as high as previously envisioned and could even start cutting rates later this year has gone a long way in easing the panic.

Having said that, the odds that the Fed will hike one final time at its next meeting have crept up slightly after several Fed officials hinted yesterday that more tightening might be needed to bring inflation back to target. The heads of Minneapolis and Boston Feds, Kashkari and Collins signalled they would be in favour of more rate increases, though the Richmond Fed’s Barkin was undecided.

The markets, however, are mainly focusing on the fact that the Fed is acknowledging that the stress in the banking sector will probably do some of the job of rate hikes and investors have fully priced in at least one 25-bps rate cut by year end. But this is less than the 50 bps that was baked in at the start of the week, providing some reprieve to the US dollar.

Dollar perks up ahead of PCE inflation

The greenback is advancing against all of its major peers on Friday, even as it’s set to finish the quarter with losses of around 2% against currencies like the euro, sterling and the Australian dollar. Only the yen is headed for substantial losses and it continued to slide on Friday, weakening above the 133 per dollar level.

A stronger-than-expected CPI print for the Tokyo region for March was unable to provide much of a lift to the Japanese currency.

It was a different picture in the euro area as headline inflation was softer-than-expected in March’s flash reading, although there was no progress for the ECB with the more important underlying measures of CPI, which inched higher.

Nevertheless, the euro slipped below $1.09, while the pound’s losses were limited with the help of an upward revision to the Q4 GDP data that showed the British economy eked out 0.1% growth.

Next to come under the radar are the PCE inflation and personal incomes and spending numbers out of the US. The core PCE price index is forecast to have stayed unchanged at 4.7% y/y in February. A positive surprise could further push up bets for a Fed rate hike in May.

Meanwhile, the stronger dollar weighed on gold only slightly today. The precious metal has been developing within a symmetrical triangle since the crisis started to fade amid the lack of clarity about future Fed rate hikes, though a breakout could be imminent.

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