Traders walking a tightrope as a cautious rally develops

Markets are cautiously recovering on moves by authorities

• US banking sector is looking at the Treasury: The Treasury is considering increasing the level of deposits insurance. 
• European bond markets reassured about Credit Suisse takeover: The takeover has asked serious questions of bondholders’ positions. 
• Reaction to the Fed will be key: The decision the Fed takes could be supportive or drive renewed panic. 
• USD is finding some recovery: The USD has rebounded on major forex.
• Equities hold yesterday’s gains: European indices look to sustain the rebound, with US futures building on support.
• Precious metals edge back lower: In commodities, gold and silver have eased back, with oil trying to recover.

Markets on a tightrope of recovery

There is a tentative recovery forming in major markets.

However, it comes with traders eyeing several factors, any one of which could tip them off the tightrope of recovery.

Here are the issues that traders are grappling with:

• Does the Credit Suisse takeover have implications for bondholders of other banks?
• The strains still in the US banking system
• Tomorrow’s Fed decision could easily be taken with positives or negatives.

Bondholders' concerns in Europe

Traders initially reacted badly to the Credit Suisse takeover by Swiss banking rival UBS. 

Holders of “Additional Tier 1” (AT1) bonds saw their positions wiped out, but crucially ahead of shareholders.

This goes against the long-held seniority of bonds over shareholders. 

European banking regulators have sought to assure markets that this is a one-off, and only in Switzerland. 

For now, markets are taking the regulator’s word for it, which has prevented massive sales of AT1 bonds on other banks and allowed a recovery in risk assets across Europe.

US banking system is still creaking

On Monday, First Republic (the bank that got emergency funding of $30bn last week) shares halved.

The US Treasury is reportedly looking at temporarily increasing the Federal Deposit Insurance Corp (FDIC) from $250,000 to cover all deposits. 

That sounds supportive, but there could be another angle. 

Could this move be seen as preventing panic or inducing it? Could such a move tell markets that there are massive problems yet to come out?

For now, though there is a sense of cautious recovery.

Fed meeting will be key 

In the decision to be announced tomorrow, the Fed could keep rates flat or hike by 25 basis points. There are pros and cons to both choices.

Keeping rates flat could be reassuring that the Fed is done with hiking.

But equally, it could induce a sense of panic that there are serious concerns for market stability.

If the Fed does hike by 25bps could be seen as a fine balance between acknowledging the risks in the banking sector (by not hiking by 50bps) and also still tackling inflation.

However, it could also be seen as a policy error of hiking rates into a banking crisis.

One thing that we can expect is marked volatility around the announcement.

A risk rally, for now

For now, we are seeing US bond yields holding higher, this is helping to support the USD this morning.

Elsewhere though the rally is forming in equity markets.

It will be interesting to see if this lasts through the Fed decision.

USD/JPY

Dollar/Yen picking up is a sign of more reassured markets (even if this is contradicted slightly as AUD/USD is falling).

However, there is still plenty to be seen before a decisive change in outlook comes on the USD.

• A run of lower highs and lower lows continues over the past couple of weeks.
• There is overhead resistance of a pivot around 132.85/134.05.
• The daily RSI is still consistently below 50.

A move above 135.10 is needed to decisively improve the outlook.

Losing the support of yesterday’s low at 130.55 would resume the downside.

German DAX

The DAX has been very volatile in recent sessions but has rebounded decisively in the past 24 hours.

Picking up sharply from yesterday’s low at 14480 a big bull hammer candle has been followed by gains today.

However, the market is at a crossroads:

• There has been a key pivot band 15150/15275 throughout 2023. This is now being tested.
• The daily RSI is approaching 50 again, previously a turning point in the past few months.

How the market responds to the crossroads will be key for the near to medium-term outlook in the coming days.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IXOne

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