US recap: EUR/USD hit third highest 2023 peak as Fed pricing adjusted

March 23 (Reuters) – The dollar index was modestly lower in late trade on Thursday after recovering from earlier post-Fed losses that had pushed EUR/USD to its 1.0930 high on EBS near this year’s 1.1034 peak.

The Fed’s dovish 25bp rate hike Wednesday in contrast to the ECB’s bolder 50bp increase on March 16, amid banking sector stress spurred on by US failures, sent 2-year bund-Treasury yield spreads to their highest in over a year before a 9bp pullback on Thursday tugged EUR/USD well off its highs.

Wednesday’s Fed hike was overshadowed by concerns that banks would tighten credit to safeguard liquidity and reduce risk.

That could amplify the impact of aggressive tightening delivered over the last year, the true economic impact of which may yet to be realized.

The market now prices at most one more 25bp Fed hike in May before steady cuts into 2024. The spreads between the current Fed funds rate and 2-year Treasury yields surged above 1%, the level that forced the Fed to begin reversing rate hiking cycles during the global financial crisis and dot-com collapses.

Sterling rose 0.2%, unable to make a new high following the BoE’s dovish 25bp rate hike, as 2-year gilts-Treasury yield spreads fell 12bp and European bank stocks fell faster than US banks.

The bigger issue for sterling is the sense the BoE is averse to much more than another 25bp hike, despite UK inflation remaining at double-digit levels as US inflation has retreated from 9.1% last June to 6% in February.

USD/JPY fell 0.64% as 2-year Treasury-JGB yields spreads dove and the haven yen attracted broader bids with risk-off flows rebounding. Prices were caught by this year’s uptrend off January and February lows, but daily and weekly charts point to this year’s lows being at risk.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Gold climbs as Fed hints at rate-hike pause

March 23 (Reuters) – Gold prices extended gains to a second straight session on Thursday, boosted by a slide in Treasury yields after the US Federal Reserve signaled an end to its monetary tightening cycle might be on the cards.

Spot gold rose 1.2% to USD 1,993.09 per ounce by 2:59 p.m. ET (1859 GMT), while US gold futures jumped 2.4% to settle at USD 1,995.90.

The Fed raised rates by a quarter of a percentage point on Wednesday but highlighted that it was on the verge of pausing.

If they truly do pause, that’s a green light for the gold market, with it being a quintessential hedge against inflation, said David Meger, director of metals trading at High Ridge Futures, adding that “it’s likely that inflation would remain elevated if they’re unable to raise rates any further”.

Gold hit a one-year high on Monday, breaching the key USD 2,000 level on safe-haven demand. However, it later ceded some ground as banking sector jitters subsided following the rescue of Credit Suisse.

The outlook still remains positive if the Fed pauses or the banking crisis carries on, analysts say.

Wall Street bank Goldman Sachs hiked its 12-month gold price target to USD 2,050 an ounce from USD 1,950, describing it as the best hedge against financial risks.

“A combination of inflation still being at lofty levels, safe haven alternative investment demand, and the weaker dollar – all of these are significant driving factors behind gold’s recent move,” Meger added.

The dollar spent much of the session near early-February lows, making gold cheaper for holders of other currencies. Benchmark US government bond yields eased and improved zero-yield bullion’s allure.

In other metals, spot silver dipped 0.3% to USD 22.95 per ounce and platinum was up 0.3% at USD 980.67, while palladium fell 1.6% to USD 1,427.17.

(Reporting by Seher Dareen in Bengaluru; Additional reporting by Bharat Govind Gautam; Editing by Christina Fincher and Shounak Dasgupta)

Banks drag European shares down as c.banks join Fed in raising rates

March 23 (Reuters) – European equities inched down on Thursday with banks leading declines after the Bank of England followed the US Federal Reserve and the Swiss National Bank in hiking rates amid worries of a banking contagion.

The continent-wide STOXX 600 index slipped 0.2% after closing at its highest level in more than a week on Wednesday.

US stock indexes rallied following a turbulent session on Wall Street where the Fed lifted its interest rate by a widely expected 25 basis points and signaled that they are unlikely to climb much higher.

“The market is still pricing more than two rate cuts by year-end. We doubt this pricing can really stand against sticky inflation, growth in the US, but also in Europe and China actually reaccelerating,” said Max Kettner, chief multi-asset strategist at HSBC Global Research.

The Swiss National Bank raised its benchmark interest rate by 50 basis points and Norway’s central bank hiked by 25 basis points, both in line with market expectations.

The Bank of England, meanwhile, raised interest rates by a further quarter of a percentage point and said it expected the surge in British inflation to cool faster than before.

UK’s exporter-heavy FTSE 100 index slid 0.9% as pound rallied against the dollar after the BoE decision.

Further weighing on the mood, US Treasury Secretary Janet Yellen told lawmakers that she had not considered or discussed “blanket insurance” to banking deposits after the failure of two US mid-sized lenders earlier this month.

European banks fell 2.4% after a tentative rebound earlier this week when UBS Group (UBSG) agreed to buy embattled Swiss lender Credit Suisse (CSGN) in a USD 3 billion rescue deal.

The index is down about 15% so far in March and set for its worst monthly showing in three years when the onset of COVID-19 pandemic fueled a sharp global selloff.

Citigroup downgraded the sector, warning the rapid pace of interest rate hikes would further weigh on economic activity and lenders’ profits.

“We’ve got a market that’s been chopping around a fair bit,” said Gerry Fowler, head of European equity strategy at UBS.

“There are definitely investors who have lingering concerns that rate hikes that are supporting the profit recovery for banks may be curtailed by the tightening in financial conditions, that their profitability is going to be a little more impaired because they have to pay higher deposit rates to maintain their deposit bases.”

Among single stocks, Sanofi (SASY) rose 5.5% after the French drugmaker said its asthma and eczema drug Dupixent, jointly developed with Regeneron (REGN), met all targets in a trial to treat “smoker’s lung”.

Dutch tech investor Prosus (PRX) climbed 6.4% after Chinese video-game company Tencent said it would restrict its focus to its core business, while maintaining cost-cutting and improving efficiencies.

The broader technology index gained 2.2%, limiting losses on the broader index.

Sweden-based bank Svenska Handelsbanken AB fell 11.1% on trading ex-dividend.

(Reporting by Sruthi Shankar and Bansari Mayur Kamdar in Bengaluru; Editing by Subhranshu Sahu, Vinay Dwivedi and Angus MacSwan)

Rupee rallies along with Asian FX as markets sense Fed pause

MUMBAI, March 23 (Reuters) – The Indian rupee strengthened to over a one-week high against the US dollar on Thursday, as markets anticipated that the Federal Reserve was near the end of its rate hiking cycle.

The rupee was trading at 82.1650 per dollar by 11:15 a.m. IST, compared to its close of 82.6550 on Tuesday.

Indian foreign exchange markets were shut on Wednesday for a public holiday.

Asian currencies were buoyant as the dollar index languished at seven-week lows after the Fed hiked rates by 25 basis points (bps) and mellowed its hawkish stance by hinting it was on the verge of pausing after the recent collapse of two US banks.

Although the Fed seemed to indicate another hike was possible and no rates would be cut this year, money markets showed a 60% probability of a pause as soon as the May meeting and 70 bps worth of rate cuts in 2023.

The rupee is seeing strength as traders need to offload dollars before liquidity issues worsen during the fiscal year-end period so they maybe capitalising on good trading volumes today, said a state-run bank trader.

Central banks in Europe and England would need to hike rates further to tame inflation, which means the dollar will stay on the backfoot for sometime, HDFC economists said in a note.

“We could see gains across most Asian emerging market currencies as well, and the USD/INR is expected to trade between 81.80-82.50 in the near-term.”

Bank of England meets later in the day and is expected to raise rates for the 11th time in a row after inflation shocked on the upside.

Meanwhile, gains in equities were capped by Fed Chair Jerome Powell reiterating the need to fight inflation and that the banking industry stress could trigger a credit crunch with “significant” implications for the US economy.

(Reporting by Anushka Trivedi; Editing by Sonia Cheema)

JGB yields dip after Fed; effect muted as fiscal year-end caps buying

TOKYO, March 23 (Reuters) – Japanese government bond yields edged lower on Thursday tracking US yields after the Federal Reserve hinted it was on the verge of pausing its rate tightening cycle in view of the current turmoil in the banking sector.

However, yields on the longest tenors bounced in afternoon trading as some investors opted to close positions ahead of Japan’s fiscal year-end at the end of this month.

The 10-year JGB yield declined 2 basis points (bps) to 0.305% as of 0500 GMT, while benchmark 10-year futures added 0.22 bp to 148.50.

The equivalent US Treasury yield sank as much as 18 bps to 3.43% overnight and remained depressed in Tokyo, trading around 3.45%.

The Fed raised rates by a widely expected 25 bps, but projected only one more quarter-point hike by year-end in a dovish shift.

“The decline in Treasury yields overnight is the main reason we saw JGB yields decline in the morning, but JGB yields had already gone down a lot” due to pressure from earlier fiscal year-end buying, said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“A lot of investors decided to just lock in profits,” she said.

The 40-year JGB yield was 0.5 bp lower at 1.525%, while the 30-year yield was 1 bp higher at 1.31%, reversing an earlier 2 bps decline. The 20-year yield was flat at 1.065% after starting the day down 4 bps. Yields on all three tenors reached at least six-month lows on Tuesday last week.

The two-year and five-year notes have yet to trade and last yielded -0.06% and 0.095%, respectively.

(Reporting by Kevin Buckland; Editing by Sonia Cheema)

Australian shares close lower as Fed throws weight behind inflation combat

March 23 (Reuters) – Australian shares closed lower on Thursday as investors gauged another quarter-point rate hike by the U.S. Federal Reserve and its reiteration to remain tough on sticky inflation, putting the local central bank’s monetary stance under heightened focus.

The S&P/ASX 200 index ended 0.7% down at 6,968.60 points, led by losses in miners. The benchmark closed nearly 1% higher on Wednesday.

The Fed pencilled in a widely expected increase in borrowing costs, but recast its outlook to a more cautious stance following banking upheaval on both sides of the Atlantic, suggesting it was on the verge of pausing rate hikes.

However, Fed Chair Jerome Powell also hinted at one more rate increase in 2023, saying the central bank would do “enough” to tame inflation.

All eyes are now on the Reserve Bank of Australia’s policy meeting due in April, where a rate pause is said to be on the cards. Traders have priced out further hikes in the cash rate, and even a slim chance of a cut, but many analysts expect at least one more rate increase this year.

“The RBA seems to be mindful of its mandate and try to limit pain to one particular borrower,” said Henry Jennings, analyst and portfolio manager at Marcus Today.

“I think we could see them (RBA) pause in April ahead of the budget.”

US Treasury Secretary Janet Yellen told lawmakers that she had not considered “blanket insurance” for US banking deposits, further damaging sentiment.

Back home, miners hit their lowest since November 28 with a 1.2% drop, as a fall in iron prices dragged sector majors Rio Tinto and BHP Group lower.

Australian banking stocks shed 0.8%, with the “Big Four” lenders trading in the red.

Gold stocks rose 1.1% as bullion prices jumped after the US Fed signalled a rate pause. Gold is traditionally considered a hedge against inflation, and a low interest-rate environment makes non-yielding bullion a more attractive bet.

Tech stocks tracked their Wall Street peers lower, falling 1.1%.

New Zealand’s benchmark S&P/NZX 50 index finished up 0.1% at 11,594.94.

(Reporting by Mehr Bedi in Bengaluru; Editing by Sherry Jacob-Phillips)

Oil drops 1% as US in no rush to refill strategic reserve

BENGALURU, March 23 (Reuters) – Oil prices settled 1% lower on Thursday, reversing early gains after US Energy Secretary Jennifer Granholm told lawmakers that refilling the country’s Strategic Petroleum Reserve (SPR) may take several years.

Granholm’s comments fed worries about potential oversupply, especially as the Energy Department plans to proceed with an additional release of 26 million barrel as part of its congressional mandate, UBS analyst Giovanni Staunovo said.

Brent crude futures fell by 78 cents, or 1%, to settle at USD 75.91 a barrel. US West Texas Intermediate crude futures slid by 94 cents, or 1.3%, to end the session at USD 69.96 a barrel.

Oil benchmarks had pushed about 1% higher before Granholm’s comments, underpinned by a lower dollar and higher gasoline prices.

The dollar index traded at its lowest since Feb. 3, a day after the Federal Reserve hinted it was nearing a pause in interest rate hikes. A weaker greenback makes dollar-denominated oil more attractive to holders of foreign currencies.

Federal Reserve policymakers believe beating back inflation may require just one more interest-rate hike this year but less easing next year than most had expected just three months ago.

Also supporting crude prices, RBOB gasoline futures hit a 10-day high after the US Energy Information Administration said stockpiles of the product fell last week by the most since September 2021. EIA/S

Higher gasoline demand will encourage refiners to use more crude oil to make fuel, Mizuho analyst Robert Yawger said.

“That large draw of 6 million barrels in EIA’s report has left a big impact on the market as the gasoline situation is looking a bit tight here,” Yawger said.

Also supportive, Goldman Sachs said commodities demand was surging in China, the world’s biggest oil importer, with oil demand topping 16 million barrels per day.

The bank forecast Brent would reach USD 97 a barrel in the second quarter of 2024.

(Reporting by Shariq Khan, additional reporting by Shadia Nasralla, Jeslyn Lerh; Editing by Mark Potter, David Gregorio and Mark Porter)

What Powell giveth, Yellen taketh

March 23 (Reuters) – The Asian open on Thursday may hinge on which of the conflicting narratives thrown up by late US trading on Wednesday investors choose to run with: the Fed’s ‘dovish hike’, or Treasury Secretary Janet Yellen’s remarks on the banking system.

Implied US rates and Treasury bond yields fell sharply after the Fed raised rates by a quarter point and Chair Jerome Powell said policymakers had considered a pause in light of the recent turmoil in the domestic banking system.

But Wall Street ultimately took its cue from Yellen, who said the government “is not considering insuring all uninsured bank deposits”, something many analysts say would go a long way to preventing further crises.

The three main US indices, which had rallied during Powell’s press conference, reversed course and closed down 1.6%.

Powell, of course, banged the anti-inflation drum and said the central bank’s base case is for no rate cuts this year. Stocks didn’t like that much, but it was Yellen’s comments that slammed financials and ultimately the broader indices – US financial stocks fell 3.7% and regional banks slumped 5.3%.

Powell’s press conference suggested the Fed is in a ‘wait and see mode’ regarding the impact from the anticipated tightening of credit standards on the economy and inflation. He said more than once that policymakers simply don’t know how the next few months will pan out.

That helps explain the dollar’s lurch lower in tandem with US yields on Wednesday. But policymakers in Asia will remain vigilant and may continue to lean toward tightening rather than pausing.

The central banks of the Philippines and Taiwan announce policy decisions on Thursday – the Philippine central bank is seen raising rates by 25 bps to 6.25%, and Taiwan’s is expected to keep its key rate on hold at 1.75%.

Inflation data from Singapore and Hong Kong are also on tap Thursday, while the Bank of England is set to follow the Fed and raise rates by a quarter point, to 4.25%.

Here are three key developments that could provide more direction to markets on Thursday:

– Japan Tankan survey (March)

– Bank of England policy decision

– Euro zone flash consumer confidence (March)

(By Jamie McGeever; editing by Aurora Ellis)

Market nerves tie US rate-setters’ hands

CHICAGO, March 22 (Reuters Breakingviews) – Federal Reserve Chair Jay Powell is well outside of his comfort zone. On Wednesday the central bank raised interest rates a quarter point. Yet two weeks ago, before a confidence crisis hit US banks, he was intimating he would jack them up even higher. As his attention bends in new ways, so must his principles.

The failure of Silicon Valley Bank nearly two weeks ago upended the US financial system, and the Fed and other agencies have had to provide a steadying hand. Prognosticators including Goldman Sachs last week changed their projections for rates because of the upheaval, expecting Powell would hold them steady. But by Wednesday morning, just before the central bank’s decision, the futures market was mostly pricing in a 25-basis point hike.

So, Powell and his rate-setting peers did what was expected. Which makes sense because any surprise would have threatened an already fragile system. Treasury yield volatility hit the highest level since 2009 last week and has only slightly eased, according to the ICE BofAML MOVE Index. Futures contracts tracking the central bank’s benchmark rate have also been shaky.

The complexity comes from the Fed’s divided mission. While the bank often talks about its “dual mandate” to stabilize prices and employment, there’s a third mandate that is often forgotten in peace times. Wall Street reforms passed in 2010 crystallized the central bank’s duty to foster a stable financial system.

Powell’s only tools are rates, and confidence. This crisis uniquely depends on the latter, and Powell tried to restore it on Wednesday by saying all deposits were safe, something he can’t actually guarantee. But his other, and blunter tool, is getting a workout too. While the Fed chair said in February that policymakers focus not on short-term market moves but “sustained changes” to financial conditions, several former Fed officials have hinted that in a crisis, following the market is the best course of action.

Rising rates played a major role in the collapse of Silicon Valley Bank two weeks ago, and the latest hike – even though it’s a small one – puts even more pressure on lenders. But with investors’ jitters at decade highs, it’s better Powell gives markets the devil they know than the devil they don’t.

CONTEXT NEWS

The US Federal Reserve raised interest rates by 25 basis points to a range of 4.75% to 5% on March 22. Investors had largely priced in such a hike, according to futures contract pricing tracked by the CME FedWatch tool.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the Fed new responsibilities for maintaining stability in the US financial system, including promoting consumer protection measures and fostering safety in payment systems. Those duties joined its long-standing dual mandate of 2% annual inflation and full employment.

(Editing by Lauren Silva Laughlin and Amanda Gomez)

US recap: Dollar dumped as Fed hike seen as segue to cuts in H2

March 22 (Reuters) – The dollar tumbled on Wednesday after the Fed raised rates by 25bp as expected and toned down the certainty of its language on future tightening, while Chair Jerome Powell highlighted data dependence and downward economic risks, which should weigh on the US currency.

The first dovish shift came with the policy statement erasing its previous reference to “ongoing increases” in rates, replacing it with “some additional policy firming may be appropriate.”

That sent Treasury yields lower, in turn creating a heavy weight on the dollar.

Policymakers left their rate projections — the median dot plots — unchanged for end-2023 at 5.1% but downgraded growth even while they projected lower unemployment and less progress on inflation than in December.

That’s not surprising given recent data and banking sector distress.

The stable dot plot suggests the Fed sees banking sector and credit risk offsetting the hot US data in recent months.

Powell remained focused on taming inflation even as almost all on the FOMC see risks to growth as weighted to the downside, with further policy adjustments data dependent.

He said the fast intervention to support depositors and banks’ use of collateral was needed to contain the fallout from bank failures.

Treasury Secretary Yellen saying that the FDIC was not considering “blanket insurance” of bank deposits also weighed risk and the dollar.

EUR/USD gained more than 1% by late trade, with smaller dollar losses versus the JPY and sterling, all reflecting tumbling Treasury yields. Two-year yields fell more than 25bp at one stage after having been up earlier in the day when risk-off trades were still being squared up ahead of the Fed.

The market is now split on whether there will be one more 25-bp Fed rate hike before rate cuts begin in earnest from H2 onward.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

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