After opening the week lower, European stocks recovered early losses to finish the day higher yesterday, as markets tried to absorb the events of the weekend, and the $3bn absorption of Credit Suisse by its bigger Swiss rival UBS.
While the deal raises a number of questions with respect to shareholder and bond holder priorities, regulators across the EU assured nervous markets that the Swiss bailout was unique to the two Swiss banks, while investors took the view that recent events would prompt a slowdown in the pace of central bank tightening this week.
Even the problems being felt in the US banking system were being shrugged off with further weakness in First Republic Bank being treated as a localised difficulty, rather than anything more systemic.
US markets also finished the day strongly, building on the gains that we saw last week with the Dow and S&P500 closing close to the highs of the last few days. This positive finish has seen Asia markets edge higher and also looks set to translate into a positive European open this morning.
With the Federal Reserve rate meeting due to start later today, markets have become increasingly divided as to what the FOMC may well do when it comes to interest rates tomorrow, with opinions split between another 25bps hike, a pause, and a 25bps rate cut.
Assuming recent gains hold, and we get no further surprises then the odds still favour a 25bps rate rise, otherwise, the Fed runs the risk that it sends the message it is more concerned about financial stability than it is about its fight against inflation. A rate cut would send an even worse message that the Fed sees something the market doesn’t and could spook already jittery markets even further.
Against that backdrop today’s European open looks set to be a positive one, however, sentiment is likely to remain fragile over the next few days until we see the outcome of tomorrow’s Fed meeting, and their take on recent events, while on Thursday we get the latest central bank decisions from the Swiss National Bank and the Bank of England.
In light of recent events, the actions of the SNB will be particularly notable given they are expected to hike rates by 50bps. If any central bank has a reason to think again about raising rates it's surprising no one has mentioned the SNB, although Swiss rates are still very low relative to their peers at 1%.
On the data front the latest UK Public sector borrowing numbers for February are expected to see normal service resumed for the UK government are the net receipts of £5.4bn that topped up the Treasury coffers in January.
Today’s numbers are expected to see monthly borrowing rise to £11.8bn, even as tax receipts showed the UK economy is performing much better than the more pessimistic expectations that we saw at the end of last year.
We also have the latest German ZEW investor survey for March which is expected to show a significant deterioration from the improvement seen in the February numbers. March expectations are expected to slow to 15.7, after hitting an 11-month high of 28.1 the previous month. The current situation isn’t expected to change that much, with an expectation of an improvement from -45.1 to -44.3.
In Canada the latest inflation numbers are expected to show a modest slowing in headline CPI to 5.4% from 5.9%, while the median core is forecast to slip back to 4.8%, in a sign that it continues to remain sticky, having been stuck around the 5% level for the previous 3 months. .
EUR/USD – retesting the last week's highs at 1.0760 as well as the 50-day SMA. A move through here retargets the recent range highs at 1.1030. Still have support at recent lows at 1.0520.
GBP/USD – had a strong day yesterday and looks set for a retest of the range highs at 1.2300, and even the 1.2450 area. Still has solid support at 1.1800 with a break targeting the 1.1640 area.
EUR/GBP – a break of trend line support from the lows last August, currently just above the 0.8700 area, could well see further losses towards 0.8620. Resistance at the 0.8830 area.
USD/JPY – slipped back to cloud support between 130.30/40 yesterday, with the main resistance still up near the 200-day SMA at 135.90. A break of 130.00 targets the 128.00 area.