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Reflecting on a Year Since the Banking Crisis and Looking Ahead
Dr. Mahnoosh Mirghaemi
April 14, 2024
4 min read
As we mark the one-year anniversary of a tumultuous period in the financial markets, sparked by the collapse of several high-profile banks, it is crucial to take a comprehensive look at the transformations within the banking sector, the broader stock market, and the macroeconomic landscape.
Then vs. Now: A year ago, the financial world was rattled by a series of bank failures triggered by aggressive Federal Reserve rate hikes and a subsequent rise in long-term interest rates. This scenario led to significant unrealised losses on banks’securities holdings and sparked fears of a widespread banking crisis. Fast forward to today, and the situation has remarkably stabilised. Interest rates have receded from their peaks, alleviating pressures on banks’ bond portfolios.The banking system has demonstrated resilience, with tightened lending standards and an environment conducive to loan growth, reflecting robust demand from consumers and businesses alike.
The Bull Market’s Momentum: The stock market has transitioned from a recovery phase into a robust bull market, reminiscent of the spirited rallies of the 1990s. This resurgence is underpinned by firming economic growth, a burgeoning tech sector, and anticipation of Fed rate cuts. While the market’s swift ascent and low volatility hint at potential complacency, any dips in response to adverse news should be viewed as buying opportunities within a continuing bull market.
A More Favourable Monetary Environment: The past year has seen a significant shift in the Federal Reserve’s stance, from a cycle of rate hikes to a pause, with an outlook pivoting towards cuts. This change reflects a material reduction in inflation,although it remains above the comfort zone. The anticipation of rate cuts later this year is set in a context of slower inflationary pressures, particularly in core CPI and shelter prices, offering a more optimistic backdrop for the financial markets.
A Quick Insight: As WTI oil breaks the $80 barrier, holding near a four-month peak amid global tensions and supply worries, its ripple effects on currency stability are noteworthy. This climb, significant since 2007, indicates a potential uptick in market volatility, with historical data suggesting a jump to 9.4% in such scenarios compared to the current 6.5%.
This surge impacts currencies in two main ways. First, it lifts inflation expectations, unsettling bond markets and stirring speculations around policy rate adjustments.Currently, break-even inflation rates in Europe and the U.S. mirror this rise,hinting at a tighter monetary outlook.
Secondly, the price increase benefits energy exporters but challenges importers, influencing currency volatility. For instance, 2022’s energy price spike post-Ukraine crisis notably affected the yen. This year, similar dynamics may push central banks in China and India to adjust currency policies, potentially affecting global currency markets.
In the complex tapestry of global financial markets, European equities are emerging as a beacon of resilience and opportunity, particularly within the banking sector.Despite the fog of economic uncertainties and fluctuating interest rate expectations, European banks shine through, buoyed by robust payouts and earnings fortitude. After a stellar 20% rally last year, the sector continues its ascent, leading the Stoxx 600 with significant gains, fuelled by central banks’ signalling of higher-for-longer borrowing costs amidst a resilient economy.
Some strategists herald banks as a pivotal choice perfectly aligned with the market’s current dynamics – undervalued sectors with cyclical momentum and favourable long-terminterest rates. Southern European lenders, such as Caixa Bank and Intesa Sanpaolo, are spotlighted for their bright macroeconomic prospects.
However, the path is not devoid of hurdles. We keep our cautious view since the potential peak innet interest income for banks and the looming risks of new bank taxes amid thebackdrop of a possibly weakening macro environment.
Resilience in the Face of Challenges: The economy has shown remarkable strength, defying the anticipated drag from previous rate hikes. While there are signs of softening,such as a slight uptick in unemployment and a slowdown in wage growth, the overall economic momentum remains positive. This resilience is bolstered by improvements in capital spending, manufacturing output, and housing investment,suggesting a sustainable path forward despite potential headwinds.
Next week’s financial journey is packed with pivotal events: Chinese retail sales and industrial production insights on Monday illuminate Eastern opportunities. Tuesday will focus on important decisions from the Bank of Japan and the Reserve Bank of Australia, as well as the German ZEW survey, which will shape our global market perspective. Wednesday highlights the Federal Reserve’s rate decision and Micron and Tencent earnings, providing clues as to direction. Central bank decisions from the Swiss National Bank and the Bank of England, as well as global PMI reports, determine Thursday. The week wraps on Friday with the German IFO survey and U.K. retail sales, ensuring a comprehensive view of the financial landscape at a single glance.
