Last week, the world appeared to be on the brink of an international banking crisis. The situation might have stabilized with Silicon Valley Bank filing for Chapter 11 bankruptcy, First Republic Bank receiving aid in the form of deposits from major players, and Credit Suisse obtaining a CHF 50B lifeline from SNB. Despite these developments, market reactions suggest investors may be positioning for worse outcomes ahead.
In the currency markets, Yen emerged as the clear winner due to risk aversion and a boost from falling benchmark treasury yields in US and Europe. Swiss Franc, Dollar, and Euro were the weakest performers as the crisis unfolded on two fronts. Australian and New Zealand Dollars showed surprising resilience, but this is likely because they were not at the center of the storm.
Risk-off moves gather steam, suggesting more turbulence ahead
A casual glance at US stock performance might not reveal the full extent of last week’s market upheaval caused by the banking crisis. While the DOW registered some losses, both S&P 500 and NASDAQ closed higher. However, the situation in Europe paints a different picture, with FTSE 100 experiencing its worst week in a year, dropping 5.3%, and DAX losing 4.3%.
In the bond market, the US 2-year yield saw its largest weekly decline in over 35 years, closing at 3.825. 10-year yield dropped to 3.395, while Germany’s 10-year yield fell to its lowest level since early February at 2.110. UK 10-year yield also dipped to an early-February low of 3.287.
Safety-seeking funds didn’t just flow into bonds. Gold surged more than 5.5%, its most significant gain since March 2020, and appears poised to challenge historical highs. Bitcoin, considered by some as a safe haven asset for now, broke through a crucial technical resistance at around 25,000 and reached its highest level in nine months. In contrast, WTI crude oil, not typically considered a safe asset, plunged to a 15-month low.
The strong momentum of moves in FTSE, DAX, and Gold suggests that market turbulence is far from over. Three central banks are set to meet in the coming days, and all are expected to continue tightening. Most market participants anticipate 25bps hikes from Fed and BoE, with a 50bps hike expected from SNB. However, the final outcomes will heavily depend on developments leading up to the meetings. Furthermore, the results themselves are likely to contribute to market volatility. So, brace for potential turbulence ahead.
Rare display of optimism in NASDAQ
In a rare display of optimism last week, the NASDAQ experienced a robust rebound. This development indicates that the corrective pullback from 12269.55 may have completed at 10982.80. In the coming days, the immediate focus will shift to 11827.92 resistance level. A decisive break above this level would likely resume the overall rebound from 10,088.82, pushing through 12269.55 towards 38.2% retracement of 16212.22 to 10088.82 at 12427.95. However, the trajectory of the NASDAQ will also hinge on developments in other markets.
FTSE faces deep trouble, DAX vulnerable as well
FTSE’s sharp decline and close below its 55 week EMA (now at 7446.94) suggest that 8047.06 record high may represent at least a medium-term peak. More significantly, the uptrend from the 2020 low of 4898.79 could have reached completion as a five-wave impulse. As FTSE enters a correction phase, near-term outlook remains bearish, as long as 55 day EMA (now at 7734.20) holds. Deeper fall could be seen to 38.2% retracement of 4898.79 to 8047.06 at 6844.42 before bottoming.
Though the outlook for DAX is less negative than that of FTSE, it remains concerning. The break below its 55 day EMA (now at 15066.64) implies that a medium-term top has formed at 15706.37, accompanied by bearish divergence in daily MACD. In the near term, DAX is expected to decline further to 38.2% retracement of 11862.84 to 15706.37 at 14238.14. Sustained break at this level, and below the 55 week EMA (now at 14314.46), would indicate the start of the third leg of the corrective pattern from 16290.19 (2021 high). Such a development would pave the way for a deeper fall toward the 2022 low of 11862.84 (2022 low).
US 10-year yield to extend correction through 3.334
Turning over to the bond markets, US 10-year yield extended the decline from 4.091 to close at 3.395. Although the fall may have slowed slightly ahead of 3.334 support level, risk remains heavily skewed to the downside as long as the 55 day EMA…
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