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The Macro Viewpoint - The Macro Viewpoint -- Assessing a turbulent week
42 Plays2 years ago
Max Kettner examines the latest moves following a volatile week for financial markets. Simon Wells and Dominic Bunning look at the ECB’s policy response and the implications for the currency markets.
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Transcript
Introduction to the Podcast Series
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
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The following podcast was recorded on the 16th of March 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Market Volatility and Banking Concerns
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Hello, I'm Aline Van Dyne in New York.
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And I'm P.S.
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Butler in London.
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Coming up on today's programme, it's been a volatile week for financial markets with concerns over the banking sector dragging down equity and bond markets.
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We assess the latest moves.
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The backdrop creates yet more challenging conditions for central banks.
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We look at how the ECB responded at its latest meeting, along with the implications for the euro.
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But first, we'll take a closer look at the turbulent week that it's been for financial markets.
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Of course, last weekend, two US banks, including Silicon Valley Bank, failed, sparking contagion fears.
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And the fallout continued throughout the week, with bank stocks and broader equity markets dropping and US Treasury yields extremely volatile.
Impact on Risk Assets and Safe Havens
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Max Kettner, Chief Multi-Asset Strategist,
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joins us to dissect the market moves.
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Max, welcome to the podcast.
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Thank you.
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Thanks for having me, Aline.
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So, Max, let's start with just describing where we've seen the biggest moves.
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Yes, of course.
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So, I think over the last week and indeed since last Thursday, risk assets have, of course, fallen quite significantly.
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I would say the most acute knock-on effects have really been felt
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in those asset classes of financial institutions.
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And of course, also, as you mentioned, the most dramatic knock-on effects that we felt have really been in government bonds, as we've seen investors rush towards really classic safe havens like gold, but also like the US dollar and indeed like government bonds.
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So, for example, we have seen the biggest falls of short dated U.S. Treasury and German Bund deals, which, of course, shows concerns around growth, but also rapidly shifting expectations about how the Federal Reserve and the ECB will respond to all this.
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So, Max, give us some context.
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Historically, how volatile have markets actually been?
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That's an interesting question because what we are seeing is that in fact equity volatility, implied volatility, so that derived from options markets, what we're actually seeing is that yes, it does really trade a little bit higher and it has shot higher over the last week.
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But in terms of levels, it is really shy of very extreme levels historically.
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So we're quite far off levels that we've seen, for example, during March 2020, during the first wave of COVID-19,
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But also, in fact, we're actually still quite a long way off the levels from some of those sharp sell-offs that we've seen last year, even.
Equity and Government Bond Volatility
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Where it is more acute in historic terms is really in government bonds.
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So when we look at implied volatility in the rates market, in sovereign bonds, then that has actually shot higher to the highest level since the global financial crisis.
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So that does underline this uncertainty around the outlook for central bank policy
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but indeed also for the outlook for global government bond yields.
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So Max, I think I know what your answer will be, but what's the main thing to look out for next week?
Central Bank Reactions and Policies
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I think probably the biggest focus, of course, at the moment is on central banks.
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How will central banks react?
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How's the Swiss National Bank going to respond?
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How's the ECB going to respond?
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How is now going forward
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the Federal Reserve going to respond particularly next week when we see the interest rate decision announced on Wednesday.
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That will be of paramount importance.
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Does the Fed continue to press ahead with rate hikes?
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What kind of comments can we hear around this new facility, this new bank term funding program, for example?
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So that really will be of paramount importance to watch next week.
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Max, thanks so much for the update.
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Thank you.
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So, given this backdrop, central banks face an even harder challenge as they try and contain bank sector stress and high inflation.
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The ECB was the first major bank to respond at today's March meeting.
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Simon Wells, Chief European Economist and Dominic Bunning, Head of European FX Research, join us now to discuss what happened and the implications for the currency markets.
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So Simon, a week is a long time in markets and if the ECB had met a week ago, would the outcome have been very different?
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Ultimately, the outcome in terms of the rate decision probably wouldn't have been much different.
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But a week ago, a 50 basis point hike would have been seen as an absolute slam dunk, not least because the ECB told us in February that that's what it intended to do outside of what it labelled extreme scenarios.
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So if ultimately in March it hadn't hiked by 50 basis points, it would have implicitly been saying what we've seen over the past week was indeed an extreme scenario.
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Ultimately, of course, it carried on.
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It raised 50, but it did change its language moving forward, suggesting that there is not now a pipeline of significant 50 basis point rises to come.
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So, Christine Lagarde, the ECB president, has been quoted as being resolute at staying the course.
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Is that still the case?
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Well, the policy statement was very clear that the ECB still projected inflation to be too high for too long.
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And of course, they did hike by 50 basis points.
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But I think looking further ahead, it has to draw some lessons from the events of the past week.
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And there were three or four dissenters.
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So whether it continues to stay the course with significant rate rises hereafter remains open to question.
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And has that affected your forecasts?
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A little bit.
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I think having learnt those lessons, perhaps 50 basis points again in May looks a little punchy to us now.
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So we now expect a 25 basis point rate rise in May and then another 25 basis point rate rise in June.
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That would still give us a terminal rate of three and a half percent on the deposit rate.
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It would just take slightly longer to get there, proceeding just a little bit more cautiously.
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Dom, how's that affecting your outlook on the euro?
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Well, I have to say, I think the ECB's decision and statement was probably as good an outcome as you could have had for the euro going into the decision, given the balance the ECB was trying to find.
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So that 50 basis point hike sort of helped to support the euro from the rates side of the equation.
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But the forward looking flexibility and that sort of softening of tone, that didn't do too much to damage things from a risk appetite perspective.
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So ultimately, I think it's probably quite a good outcome for the euro.
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But it's that balance between rate dynamics on the one hand and risk appetite on the other hand, which is really what we need to think about when we look at not just the euro, but a number of different currencies.
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Now, in periods of market volatility, one currency that's seen as very defensive traditionally is the Swiss franc.
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Not so much these days?
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Well, it's interesting.
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We've been quite bearish on the franc for the last few months.
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And we'd argued that the safe haven properties of the franc weren't really required.
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Actually, we thought that the outlook for 2023 was generally more positive.
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So at the start of last week, you know, you started to see the Swiss franc do quite well on those initial signs of market volatility.
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And then the challenges seem to spread into Europe and into Switzerland itself.
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And that did suggest that maybe the franc doesn't have that same degree of safety.
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Now, what you normally see in those periods of volatility, as you say, is lots of hot money, capital inflows into Switzerland, foreign investors putting money into the currency for safety.
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Whether that will be as forthcoming, given the latest developments, is maybe a little bit less likely.
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But actually, more broadly, if we have an environment where ultimately growth is bottoming out, inflation is coming down around the world, then the need for a safe haven might be less anyway.
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So we still think the Swiss franc has a bit more downside from here.
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And what
Impact on Currencies and Future Expectations
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about sterling?
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Obviously, we had the budget yesterday.
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What's the outlook there?
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Yes, sterling still sits in that kind of positive risk bucket.
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And as I say, it's this battle for many currencies between risk dynamics and interest rates.
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For now, the risk dynamic seems to be turning for the better.
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We seem to be getting through this period of financial market volatility and some of the domestic.
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stories in the UK are turning out to be a little bit better than we had feared and that ultimately is quite a good thing for the currency.
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So signs that growth and activity are improving relative to expectations, signs that inflation is coming down compared to what was expected, those are probably quite positive things from a UK centric perspective.
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So we still maintain a pretty positive view on sterling from here.
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And Simon, the UK's Monetary Policy Committee meets next week.
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What are you expecting for them to announce?
00:09:37
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Well, we're expecting that they will proceed with a 25 basis point rate hike, and that will be the final one in the cycle.
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As Dominic says, UK activity data has been pretty good.
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There's some evidence of the labour market cooling, but it's not huge.
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But ultimately, it may come down to do financial markets stabilise over the next week,
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And what is next week's UK inflation print?
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It could be a very close call between 25 up and zero.
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Shortly after the ECB's meeting, markets were pricing a smidgen above 50% chance of a 25 basis point rate hike.
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And to be honest, if you were going to see one of the major central banks pivot, it could well be the Bank of England to move first.
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The governor has already said, don't presume we're going to do any more.
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So it'll be an interesting one to watch and a tough one to call.
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Well, we'll probably come back to you next week on that.
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Thank you for joining us and Dominic as well.
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Thanks.
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Thanks very much.
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So that wraps things up for another week.
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Special thanks to our guests, Max Kettner, Simon Wells and Dominic Bunning.
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From all of us here, thanks for listening.
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We'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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