Markets on thin ice with continued bank rout. What does it mean for traders?

Following the Silicon Valley Bank’s fallout, fears of financial instabilities have flowed over to Europe, with Credit Suisse delivering yet another bombshell to the global risk environment. In both cases, authorities have intervened swiftly to contain widespread panic, hoping that their backing will help to restore confidence. Particularly for Credit Suisse, it is able to secure a lifeline of up to 50 billion Swiss francs from the Swiss National Bank under a covered loan facility and a short-term liquidity facility. That may provide some calm amidst the storms for now, provided that there are no new headline of another banking woes, which could easily throw everything into disarray once more.

Nevertheless, the landscape has shifted. Other than just taking inflation into consideration, expectations are that central banks will have to tread carefully now to mitigate further cracks in the global financial system. A 25 basis-point hike from the Fed next week is the consensus (35% probability priced for a rate pause), while expectations suggest we could see an end to the rate hiking cycle by June this year.

Gold catching safe-haven flows but US$1,960 will be key resistance to overcome

Gold prices have rebounded as much as 7% over the past week, with the risk-off environment triggering safe-haven flows, while less hawkish rate expectations have also been supportive of the non-yielding yellow metal. With the Fed’s backout period in place, much will hinge on the Fed meeting next week to validate such expectations. At least for now, US inflation data this week seems to provide some room for a rate downshift from the central bank while waiting for the dust to settle.

Looking ahead, the confirmation of a bullish pin bar on the weekly chart seems to provide an upward bias but strong resistance could be expected at the US$1,960 level. Having largely traded in a longer-term consolidation pattern since 2020, the level has marked multiple tops for the yellow metal, with the recent one being in February this year.

S&P 500 clinging on to its last line of defence

Since the onset of the SVB’s fallout, the S&P 500 has breached multiple support levels, which includes a breakdown of its rising wedge pattern, a key Fibonacci confluence at the 4,000 level and its 200-day MA. For now, it seems that the 3,800 level could be the last line of defence for the bulls, which dip buyers have attempted to hold at the start of this week, triggered by headlines of the Fed’s rescue plan. This level also marked the base of its previous consolidation zone, where a 38.2% Fibonacci retracement stands. Any breach below this level could seek to overturn the higher-lows narrative in place since October last year, potentially paving the way to retest the 3,500 level next.

Is the US dollar losing steam?

The US dollar has been a beneficiary of safe-haven flows as well, but a less hawkish recalibration in rate expectations is also keeping bullish sentiments in check. Its moving average convergence divergence (MACD) has trended lower recently, suggesting some moderation in upward momentum. Near term, the 103.12 level will remain a key support to hold, failing which could pave the way to retest the 101.30 level next. Greater conviction for the dollar bulls could come from a move above the key 105.00 level, where a Fibonacci level stands in confluence with its 100-day MA.