Market Overview
Entering into the second quarter of the year offers a moment of pause to look back at the performance of the first quarter of 2023. While most market participants expected challenges from looming recessionary conditions and challenges by the US Fed to curb inflation, the liquidity crisis that led to the collapse of SVB bank and New York’s Signature Bank and the takeover of Swiss giant Credit Suisse by UBS was largely unpredicted at the beginning of the year. While the threat of such “Minsky Moments” is still a possibility, the drop in bank borrowing from the Federal Reserve since the takeover of SVB last week is a positive sign that the crisis would be contained. The White House is proposing to tighten regulations on mid-sized banks which may tighten credit conditions going forward.
European indices did better than their US counterparts with the EuroStoxx 50 yielding 13.74% YTD in EUR compared to the S&P 500 Index 7% performance in USD. Asian markets tracked behind Europe and the US, but also ended the quarter on a positive note. The announced split of Alibaba Group Holding’s USD 257 billion business empire into six independent units would help unlock value in Chinese tech. Impact of the banking stress and higher interest rates have dropped global M&A to its 10-year low in Q1. There was some positive news last week- The annual core personal consumption index fell from 4.7% in January to 4.6% in February which was a sign of success in the Fed’s fight against inflation. Headline inflation also fell sharply in the Euro Area although core inflation slightly ticked upwards. The important data releases for the week would be the stream of PMI data and the March nonfarm payrolls. US corporate guidance starting with bank earnings releases would soon be in focus as Q1 reporting season starts.
Commodities FX and Bonds
The drop in sovereign yields have led to US investment grade and non-investment grade bonds outperforming their European counterparts. Gold has risen over 8% following the stress in the banking sector. In commodities, Saudi Arabia is leading a coordinated effort to remove over 1 million barrels per day (BPD) from global oil supplies in response to the US government’s decision not to begin refilling its Strategic Petroleum Reserve this year- the move pushed oil prices back over $80/bbl. With OPEC support of the Saudi initiative and increase in global demand following the reopening of China, a further upside potential exists for oil prices to climb further in the following months.
Please find the full weekly note below:
