Market sentiments remain fragile as the fears of a financial crisis are still far from being contained yet and hence volatile moves cannot be ruled out.

Ravindra V Rao, VP-Head Commodity Research at Kotak Securities

Panic gripped investors this week as the banking crisis spread from the US to Europe, sparking fears of a contagion in the global financial markets.

The week started with plans by the US regulators to stem further systemic risk with a joint statement from Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J Gruenberg that the FDIC will make SVB and Signature’s customers whole. However, this failed to calm investors’ nerves.

Moreover, Credit Suisse and First Republic Bank added to the list of troubled banks, yet another reason to keep markets edgy. Credit Suisse shares hit an all-time low after its largest investor, Saudi National Bank, Credit Suisse’s largest investor, refused to provide any more funding after the Swiss lender found “certain material weaknesses in internal control over financial reporting” for the years 2021 and 2022. First Republic Bank, the San Francisco-based lender, too saw a similar fate, after S&P Global Ratings and Fitch Ratings cut their ratings to junk.

This led to a fresh wave of anxiety and as a result, investors flocked to safe-haven assets, helping the dollar recover from below 104 levels. Similarly, bond markets saw intense activity with US 10-year treasury yields and 2-year treasury yields tumbling below 3.45 percent and 3.75 percent, respectively. European bond yields too plunged in the wake of the Credit Suisse crisis with 2o-year German Bond yield slipping to 2.373 percent, its lowest level since mid-December, while benchmark 10-year Bunds fell to 2.11 percent in their largest single-day drop since 1990.

COMEX Gold jumped to a six-week high of $1,942.5 per troy ounce buoyed by safe-haven bids and renewed investment demand. SPDR Gold holdings rose for four straight days through Thursday to a three-week high at 914.72 tonnes. COMEX Gold reported a more than 6 percent weekly gain, while Silver closed the week with a whopping 10 percent upside. On the other hand, global risk aversion took the sheen off crude oil and copper, which slipped to thier lowest since December 2021 and January 2023, respectively.

Oil prices fell over 10 percent, the biggest weekly decline of 2023, hurt further as both OPEC and IEA signalled an oil market surplus while reiterating that Chinese demand recovery may counter weaker consumption from some Western markets. China’s parliament authorities’ intention to maintain stability and credibility in order to boost investor confidence by reappointment of Yi Gang as the central bank governor and Liu Kun as finance minister, did not elicit a major market reaction.

Now that both Credit Suisse and First republic have received a commitment to rescue packages, bond yields and risky assets have recovered from lower levels in a temporary sigh of relief. The Swiss central bank agreed to loan the bank up to 50 billion francs ($54 billion) to bolster confidence in the country’s second-biggest lender following the collapse of two US banks. 11 big banks stepped in to aid the First Republic with $30 billion in deposits as a sign of confidence in the banking system. Having said that, market sentiments remain fragile as the fears of a financial crisis are still far from being contained yet and hence volatile moves cannot be ruled out.

Besides, markets now assign an 85 percent chance to a 25 bps rate hike in the FOMC meeting next week, with fading hopes of a pause or a rate cut, especially after ECB raised interest rates by 50 bps, reiterating commitment to tame inflation despite financial markets’ turmoil. Also, investors remain divided on the Bank of England’s policy decision while Flash PMI figures will be closely watched for the early signs of economic activity in major global nations in February.

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