Markets Wrap (27 February – 12 March)

Stocks
US stocks had the worst week (S&P 500 -4,55%) so far in 2023, as the market was roiled by collapses of several US banks, one of them (Silicon Valley Bank) being the largest financial institution failure since the fall of Lehman Brothers. US regulators have announced that depositors would have access to their funds, even those exceeding USD 250 thousand – the amount which falls under federal deposit insurance. Treasury Secretary J. Yellen assured  that the banking system is resistant and well capitalized, but investors  fear that FED tightening may lead to more turmoil. 

Following recent market selloff, P/E ratios of the world’s main stock indices fell below 5-year and even 10-year average values (Chart 1), but the uncertainty related to the interest rate environment seems to be too high for a significant pickup in the risk appetite.

Interest rate expectations
Following the collapse of Silicon Valley Bank, the odds for a double (50 bps) FED hike on 22 March quickly fell from 70% to virtually zero, whereas Goldman Sachs analysts predict no hike at all. The ECB is still expected to increase key rates by 50 bps on 16 March, after several senior officials indicated the need to keep up the tightening pace. Core price growth in the euro area has yet to peak – in February, it accelerated from 5.3% to 5.6% – a fresh all-time high. 

Futures contracts indicate that the market has scaled back maximum interest rate expectations by 65 and 40 bps in the US and the euro area (to 5.20% and 3.75% respectively) over the previous week amid rising fears of contagion in the US financial system.

Bond yields
The spread between US Treasury 2y/10y yields exceeded 1 percentage point, which is the most negatively sloped curve in this segment since 1981, before shrinking to 70 bps (Chart 3), as the market scaled back on monetary policy tightening expectations. The spread, widely seen as the most accurate indicator of upcoming recessions, is at odds with recent macro data, which gives ground to a soft landing (or perhaps, no landing at all) scenario. The number of nonfarm payrolls in the US in February stood at 311 thousand – 86 thousands above Bloomberg median forecast, whereas growth of average annual earnings accelerated from 4.4% to 4.6%.

Commodities
SEB analysts made downwards adjustments to energy price forecasts, but still expect prices to rise in the near-term (Charts 5 and 6). The demand for oil should increase on strengthening demand from China, where economic recovery after the removal of Covid-19-related restrictions has exceeded expectations, while Russian crude production and exports are falling. Higher prices of natural gas in Europe are also likely in spring , as it will be more difficult to reign in  demand through cuts in consumption, and a reviving Chinese economy may cause larger import volumes in Asia). 

The price of iron ore climbed to the highest level YTD of USD 121 per metric ton, following a drop in inventories at Chinese steel mills at the very beginning of what is typically the busiest period in construction, which lasts from March through June.