Shares rose as global regulators scrambled to boost market sentiment, with the latest financial turmoil fueling speculation that the pace of tightening by major central banks might slow.

A previous haven bid failed, with a majority group in the S&P 500 winning. A gauge of US banks climbed after falling 15% last week.

First Republic Bank was sold after further credit downgrade, missing a rally from its local peers led by New York Community Bancorp. UBS shares rallied as investors focused on the benefits of a takeover of Credit Suisse Group.

The tech-focused benchmark underperformed after the Nasdaq 100 posted its biggest weekly gain since November. Renewed risk appetite weighed on US Treasuries and the dollar.

Global central banks have joined forces with the Federal Reserve to ease the supply of dollars, with no impact on the greenback – a sign that the latest banking crisis may not put too much pressure on the financial system.

Just a few weeks ago, investors were betting that the Fed would raise rates closer to 6% and the European Central Bank would raise rates more than 4%.

Now the market is signaling that the tightening cycle is coming to an end and is betting on at least four US rate cuts by the end of the year. There is a 70% chance that the Fed will raise rates by 25 basis points this week.

Traders now see the Fed’s benchmark interest rate around 4% at year-end – a full percentage point below the central bank’s December rate estimate in its ” dot plot”, which is part of its quarterly economic forecast.

In line with the theme of restoring confidence in the banking system, Fed Chairman Jerome Powell is expected to reiterate that further progress must be made towards the goal of price stability, said Ian Lyngen of BMO Capital Markets.

“Dovish rate hike”

“Dovish rate hike” remains our bias, Lyngen added.

FHN Financial Chief Economist Chris Low said: ‘We expect a 25 basis point increase in the dot chart and up.’ “50 basis points is reckless, but no increase shows that the banking crisis is crowding out the fight against inflation. 25 basis points seems fair.

With the Fed opting for no rate hike, the language it uses to present this choice will be critical in shaping the overall yield curve.

While no one knows how much the recent turmoil has shaped the rate hike debate, Fed officials should align themselves with European Central Bank President Christine Lagarde, who stressed last week that there was no compromise between price and financial stability.

“It’s a very strong statement that banking problems are not going to derail the tightening cycle,” he noted. “We believe that view is shared by almost all central banks, including the Fed, which supports our call for a 25 basis point rate hike this week.” shows

Turbulence in the US banking sector makes a soft landing less likely, with a possible “Minsky moment” The concept stems from the writings of American economist Hyman Minsky, who specialized in studying how excessive borrowing exacerbates financial instability.

“Even if central banks succeed in containing the contagion, credit conditions are expected to tighten more quickly due to pressure from markets and regulators,” Kolanovic wrote.

The federal home loan banking system issued $304 billion in debt last week, according to a person familiar with the matter who spoke on condition of anonymity and discussed nonpublic data. That’s nearly double the $165 billion that cash-hungry lenders have withdrawn from the Fed.

A banking crisis in a matter of days could kill an overheated economy, increasing the chances of a recession that the Fed is trying to avoid.

As Powell and his colleagues gather for a two-day policy meeting on Tuesday, the question is whether the brakes are suddenly being applied too hard.

The central bank wants an economic slowdown – deemed necessary to curb inflation – but not a crisis that could plunge the economy into a deep recession.

“The most likely outcome is a 25 basis point hike,” said Seema Shah of Principal Asset Management.

“If market volatility escalates in the coming days, there could even be a pause. Ultimately, financial conditions will tighten further – either through central banks tightening monetary policy further as they are trying to curb inflation, either by weakening the current banking crisis.”

Shah added that in potentially turbulent times ahead, high quality defensive assets should be sought and diversification will become increasingly important. Prefers to maintain a defensive positioning.

“While a pause or change in Fed policy could trigger a short-term recession, we don’t see it as a panacea, especially if the economy slides into a recession later this year”, added Lerner.

“Given the mystery of still-high inflation, the Fed’s response to current events may not be as aggressive in monetary support as it has been in the past.” Watch what the Fed will say about its $8.6 trillion balance sheet.

Until this month, it had contracted as part of the Fed’s efforts to bring it back to pre-pandemic levels.

But now it is growing again as the Federal Reserve embarks on a series of emergency lending programs to shore up the banking system. The latest move came on Sunday, as it joined other central banks in boosting dollar liquidity.

Some say worries about financial stability could push policymakers to reduce the depletion of their bond portfolios, a process known as quantitative tightening that aims to drain reserves from the system.

The bankruptcy of three national lenders and the escalating banking crisis in Europe have weakened but not cracked US stocks – until now. Beneath the surface, the most financially unstable companies are falling behind their stronger counterparts in unprecedented ways.
Dividing the Russell 1000 into four baskets based on leverage versus market capitalization shows just how big the gap can be.

The basket of companies with the highest credit loads fell 3% last week, trailing the basket of companies with the soundest financial health by 4.8 percentage points. Since 2008, there have only been two instances where the gap has been larger – the peak of the pandemic collapse in March 2020 and the week of the Lehman Brothers collapse in September 2008.

turmoil in the banking sector, higher-than-expected inflation data, and renewed hopes of a dovish Fed pushed bitcoin to its highest level in about nine months.

The largest digital coin hit $28,000 for the first time since June. Bitcoin is now up over 70% year-to-date. Other tokens have also risen, with Ether up nearly 50% since Dec. 31, while Solana, one of the biggest decliners of the past year, more than doubled.

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