Commodities saw a relief rally this week as the United States Federal Reserve (Fed) hinted at a pause in rate hikes and easing concerns of an immediate contagion. Dollar fluctuated largely between 102 and 104 levels as risk sentiments wavered ahead of Federal Open Market Committee (FOMC) policy decision and as markets assessed emergency measures taken by the US and Europe to safeguard the global banking system.
Initially, risk appetite improved on reports that US officials are reportedly studying ways to temporarily expand Federal Deposit Insurance Corporation (FDIC) coverage to all deposits, in order to avert a potential financial crisis. Also, UBS Group AG agreed to buy rival Credit Suisse Group AG with Swiss regulators playing a key role in a rescue deal as governments looked to contain the financial crisis. First Republic Bank too, took a sigh of relief after a sharp sell-off as US Treasury Secretary Janet Yellen said the government stood ready to provide further support for smaller lenders, if needed.
Besides, FOMC policy decision was on expected lines as the Fed raised the federal funds rate by 25 basis points (bps) to between 4.75 percent to 5 percent and kept the “terminal rate” unchanged from the December estimate at 5.1 percent by the end of 2023. Projections indicated Fed expects only one more quarter-point rate hike before they pause, exerting pressure on both dollar and US treasury yields. Dollar tumbled to 101.91, the lowest since January, while US 10-year treasury yields slipped below 3.4 percent. However, Fed Chair Powell was quick to add that rate cuts are currently not in the central bank's “baseline expectation”. Still, the greenback did not see a significant rebound as CME Fedwatch tool shows Fed funds futures pricing in 75 bps rate cuts by end 2023.
COMEX Gold plunged to $1,936.5 per troy ounce after hitting a one-year high of $2,014.9 per troy ounce earlier in the week, but rebounded sharply above $2,000 per troy ounce on renewed concerns regarding the banking sector after Treasury Secretary Janet Yellen said the FDIC was not considering providing "blanket insurance" for banking deposits. Fed Chair Powell too couldn't promise to backstop all deposits.
Along with this, comment by US Energy Secretary Jennifer Granholm that it will be “difficult” to refill government oil reserves this year, led to a pullback in WTI oil prices from above $71 a barrel to $69. Still, crude oil prices saw a weekly upside of around 4 percent. Base metals did not see a major price retreat and closed the week with decent gains as markets expect an improving consumption outlook ahead of peak construction season in China.
However, risk off has returned with fresh concerns regarding Deutsche Bank, whose shares dived by more than 13 percent on Friday adding to a 30 percent decline for the month of March. Credit default swaps, a form of insurance for a company's bondholders against its default, jumped to 173 bps on Thursday from 142 bps the previous day. This highlights that investors remain wary of spill-over risks in the wake of emergency rescue of Credit Suisse.
Coupled with this, the US probe on UBS and Credit Suisse as to whether financial professionals helped Russian oligarchs evade sanctions will add to uncertainty in the macro economic environment and keep investor confidence fragile.
Next week, investors will focus on Core Personal Consumption Expenditure (PCE), the Fed's preferred inflation gauge, to see if price pressure moderated in February as expected. US final gross domestic production (GDP) figures and speeches by some FOMC members will be keenly awaited, while China’s Purchasing Managers’ Index (PMI) figures may show whether the sharp rebound seen in February is extended to March.
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