Market reassess risks to European lenders
This Daily Digest will cover:
- 🪙 Market reassess risks to European lenders
- 🏦 Monetary policy divergence opening up
- 🌏 EUR to continue bullish momentum
- 💵 Crypto the golden child
Where to start?
Well, what a market it has been to come home to after a leave of absence. There is a distinct lack of consensus in the market and risk taking looks to be light. My medium term view that risk puts in new cyclical lows as financial conditions continue to tighten remains intact, but aggressive balance sheet expansion by the Fed seems to be staving that off for now. As the liquidity injection calms fears of wider contagion, divergent monetary policy between Europe and the US is opening up interesting opportunities in FX.
The narrative at the end of last week that banking turmoil was shifting back from the US to Europe was the key driver of markets. Sentiment this week has turned more optimistic as the market has reassessed risks to European lenders and appears calmer. Once the market begins to look past the banking crisis, respective central bankers are striking a different tone. US Treasury yields have been bouncing around like crazy, but the Fed’s hand has seemingly been forced and the shift down in the curve is clear. On the other hand, Andrew Bailey sounded relatively hawkish in his remarks yesterday. While saying that rates should not be taken to the 2008 peak, he stressed how the UK banking system is in a sound position and that inflation remains the key focus, with further rate hikes possible if inflationary pressures persist. Likewise, his counterparts at the ECB reiterated their commitment to ongoing hikes. Isabel Schnabel said she wanted the ECB March statement to include a reference that more hiking was possible. We will hear more from Christine Lagarde today. The divergence in monetary policy comes on the back of what is seasonally a good time to be short USD and is coupled too with the (somewhat bizarre) view of some participants that the successful ringfencing and unwinding of the affected banks cauterises the wound and sets the stage for a continuation of stronger-than-expected growth. I could see a continuation in bullish EUR/USD momentum up to 1.1000 and am positioned as such.
Crypto deserves more than a footnote after its performance the last couple weeks. After initially benefiting from ideological demand amid the banking collapse, it then rode the wave of liquidity all the way up to 29,000 BTC/USD. Its performance has cooled this week and I fear it will still get caught in the cross current of high beta equity performance despite its recent outperformance. It takes a brave trader to go short though and my view remains buy on dips. Good luck out there – it isn’t easy. Ask the hedge funds.