After the big sell-off at the end of last week, European markets started the week in a positive fashion as the banking sector angst of the last few days eased slightly.
Most sectors of the markets saw a modest rebound, helped by events on the other side of the Atlantic as reports emerged that Citizens Bank in the US had agreed on a deal to acquire Silicon Valley Bank’s loans and deposits book.
US markets had a more mixed session with the S&P500 finishing higher for the 3rd day in a row, however, the Nasdaq found life slightly more difficult, finishing the session slightly lower, after US 2-year yields pushed back above 4%
This sharp rebound in 2-year yields on both sides of the Atlantic, appears to be a decent corrective to last week’s sharp plunge, as markets look to reprice some of the more dire recession scenarios that were being priced at the end of last week.
The rebound in yields also suggested that a calmer tone was starting to prevail in the short term, even as sentiment seems likely to remain on the cautious side over the next few days.
This caution was reflected in the extent of yesterday’s rebound in bank stocks given that none of the gains seen yesterday came close to reversing the losses seen from last Friday.
Therein lies the rub, that for all of yesterday’s quieter session, the fact remains that markets are still one negative headline away from another sharp tumble.
This week’s price action is also likely to be susceptible to month and quarter-end flows, which may well assign a misleading skew when it comes to what the market may look to do next.
One thing that was notable yesterday was that a number of ECB policymakers, while still making the case that inflation was still too high, started to temper their remarks with nods to concerns about financial stability, with Spain’s De Cos and Portugal’s Centeno making reference to these issues when making future policy decisions.
This more nuanced approach was welcomed in contrast to ECB President Lagarde’s rather tone-deaf comments last week that there was no trade-off between financial stability and price stability.
Yesterday’s more positive tone looks set to carry into today’s European market open with a modestly higher open.
The pound could well be in focus today with Bank of England governor Andrew Bailey set to brief MPs later this morning on the Silicon Valley Bank situation with respect to its UK operations. Yesterday, Bailey made a number of comments with respect to the central bank’s inflation outlook, indicating that further rate hikes may well be limited. His comments to the London School of Economics also reiterated the remarks he made last week, post rate decision, that the bank expected headline inflation to fall sharply in H2.
EUR/USD – still feels toppy anywhere above the 1.0900 area after last week’ s failure at 1.0930. Feels rangebound with support at the 50-day SMA at 1.0730. Below 1.0730 opens up the 1.0520 level.
GBP/USD – edging above the 1.2300 area again but needs to push through the previous highs at 1.2345 to kick on towards the previous peaks at 1.2445. The pound continues to feel vulnerable to slipping back towards the 1.2170 area while below the highs of last week. A move below the support at the 1.2170 area, opens up the potential for a move towards 1.2020.
EUR/GBP – slipped back to the support at 0.8770/80 area. A break below here opens up the risk of a move towards strong trend line support at 0.8720, from the lows last August. On the upside we have trend line resistance at the 0.8870/80 area.
USD/JPY – feels like we may have put in a short-term base after last week’s failure below the 130.00 area. We need to see a move through the 132.00 area to signal a deeper move towards 133.20.