Fed Bets Fuel Volatility As Bank Woes Hit Stocks

There was a renewed bout of volatility on the global market as investors fretted over the stability of the financial system, prompting speculation that major central banks would have to stop raising rates amid rising worries about the recession.

‍

In the wake of assurances from authorities about the banking sector, stocks rebounded after the gauge of US financial heavyweights fell to its lowest level since October 2020. Several weeks ago, Deutsche Bank became the latest focus of the turmoil when its shares slumped the most in three years after concerns about the industry sparked the slump. According to Bloomberg News, UBS and Credit Suisse are also being investigated by the US for helping Russian oligarchs to escape sanctions.

‍

An unscheduled meeting of the Financial Stability Oversight Council will take place on Friday at the Treasury Department with the heads of top US financial regulators convened by Janet Yellen. According to German Chancellor Olaf Scholz, there are no reasons to be concerned about the bank since it is a "very profitable" company, and is therefore not a cause for concern. The European Central Bank President, Christine Lagarde, has told European Union leaders that the banking sector in the region is very strong, according to sources familiar with the situation.

‍

It is estimated that the Treasury rates will fall by 30 basis points in the next few months and that German two-year rates will also fall by over 20 basis points in the next few months. The swap rates linked to policy meetings have completely abandoned wagers on a May rate increase and are increasing bets on rate cuts starting in June, despite the fact that Federal Reserve Chairman Jerome Powell stated on Wednesday that it is not his "base case" to cut rates. There is no longer an expectation of an additional quarter point rate hike by traders for the Eurozone and Bank of England.

‍

In the meantime, there is a fragile level of confidence, market volatility is likely to remain high, and policymakers may need to take even greater measures to ensure that the global financial system remains strong, says Mark Haefele, chief investment officer of UBS Wealth Management. Furthermore, despite the fact that the central banks have eased down on interest-rate hikes, financial conditions are likely to tighten, and this will raise the risk of a hard landing.