Early Morning Call: Dollar drops as markets no longer expect 50 bp hike from Fed; US CPI next

Equity market overview

Europe equity markets fell heavily yesterday in the wake of the collapse of Silicon Valley Bank (SVB) and Signature Bank, despite attempts by regulators to reassure the markets.

The FTSE 100 dropped 2.58%, and the DAX by just over 3.04%. Banking stocks led the losses. The STOXX banking index fell 5.7%. In Germany, Commerzbank lost 12.7%, in Zurich, Credit Suisse fell 9.6% to a record low.

In the US, indices lost less ground, the Nasdaq even managed to end the session in positive territory. SVB financial fell another 63% yesterday. Some US regional bank stocks were severely hit yesterday. First Republic Bank lost 61%, Western Alliance Bancorp was down 47%, Zions Bancorporation -25%, PacWest Bancorp -21% to name a few.

Major banks also fell, but to a lesser extent. Bank of America fell 4.3%, Citigroup was down nearly 7%, Wells Fargo -5.8%, while JP Morgan 'only’ lost 1.35%. In total, major banks lost around $90 billion in stock market value, bringing their loss to $190bn during the last three sessions.

Two-year treasuries had their biggest rally since 1987 and the market priced out any chance of a 50-basis point (bp) hike at the Federal Reserve's (Fed) next meeting next week. Instead, Fed fund futures indicate a 70-basis point cut by year-end.

APAC indices

Likewise, indices were down in the APAC region. In Australia, Westpac consumer confidence remained at 78.5, holding near historical lows, as high inflation and rising interest rates continue to weigh on household budgets. NAB business confidence fell 10 points to -4 in February, erasing the bounce of last month. The survey paints a mixed picture. On one hand business conditions remain resilient with strong sales and employment, but here too, high inflation and rising interest rates had a very negative effect on the overall confidence.

US inflation data

The collapse of Silicon Valley Bank and Signature Bank raised doubt as to whether the Fed will pursue its tightening policy next week. Looking at Fed fund futures, a 50-basis point hike is now out of the question, but could the latest US inflation data shake things up again? US consumer price index (CPI) is expected to rise 6% in February year-on-year (YoY), decelerating from the 6.4% recorded in January. Core CPI is also forecast to ease, to 5.5% YoY, after 5.6% in January.

It follows Friday's jobs report which showed a still tight labour market, with over 300,000 job creations last month, but also indicated that wage inflation remained on a downward trend, down 0.2% month-on-month (MoM), the lowest increase in a year.

Equities

Elsewhere on the equity market, Close Brothers declared a statutory operating profit before tax of £11.7 million in the first half (H1) of its fiscal year, down from £128.9m in the same period a year ago, a performance mainly due to a provision of £114.6m in relation to the winding down of its loan business.

Old Mutual reported a 10% rise in full-year profit. The insurer, the largest life insurer in South Africa, said it benefitted from a drop in mortality claims in its biggest life insurance business. It nonetheless warned that the outlook remained risky for insurance firms in a context of rising interest rates and tough domestic economic conditions.

Volkswagen announced it will be investing €180bn in the next five years. Two thirds of that amount will be spent on electrification - including making batteries - and digitalisation in China, up from 56% in the previous five-year plan.

Credit Suisse fell to new record low yesterday, dropping another 9.6%. Earlier this morning the Swiss bank published its 2022 annual report. According to the document, customer "outflows had stabilised to much lower levels but had not yet reversed". Customers of the Swiss bank have been withdrawing funds in the fourth quarter following a string of scandals.