Daily Market Outlook, March 22, 2023

Markets Take A Break From Bank Bashing To Focus On The FOMC

Asian equities extended the positivity from Wall Street as the US benchmarks all ended in the green for a second day as stability in the banking sector led investors to reposition in the sector as market attention moves to today’s FOMC decision. Nikkei 225 posted 2% gains on the session as it played catch-up on return from holiday amid notable strength in the banking industry and with Japan announcing a JPY 2tln buffer from reserves to soften the impact on the economy. The Hang Seng and Shanghai Comp are also in the green for the session gains in the Shanghai Comp were more muted absent PBoC’s liquidity provisioning, this coupled with US initiatives to reduce activity in certain foreign semiconductor firms that access the USD 52bln of chips funding from the US.

The main market event is the monetary policy decision by the FOMC. Until the recent banking crisis and subsequent market turbulence, it was widely expected that the Fed would raise interest rates again at today's meeting. The market was starting to actively price that the Fed would re-accelerate the rate path to raise by 50bps at the March meeting. The landscape has shifted and a 50bps now seems like a tail risk at best, markets are also pricing the potential that the Fed will choose to pause, however, this move could have the potential to increase market concerns regarding the recent banking stress as investors may view a pause as a panic move. Fed policymakers have been in their ‘black-out period’ over the past ten days which means that they have not publicly commented on recent developments. This all means that this meeting is probably the most uncertain Fed meeting in recent memory. A 25bps hike would appear the middle ground outcome but markets watchers deem the decision to be on a knife edge. Adding to investors anticipation this meeting is one where Fed officials will update their economic projections, most importantly an update will be given for the ‘dot plot’ of interest rate expectations. Expect policymakers to reassess their previously indicated intentions to raise their rate predictions given that the tightening in financial conditions the Fed were seeking has started to occur as a derivative of the stress in the banking system leading to a restriction in lending activity. While officials will be cognisant of presenting a reassessment in forecasts it is likely that they will be reluctant to overhaul terminal expectations materially lower than 5%, this is in direct conflict with market expectations, as investors are actively pricing Fed rate cuts into year end. The key for market perception and pricing going forward is likely to be driven by Fed Chair Powell's press conference and is assessment of risks from the banking

FX Options For 10am New York Cut

USD/JPY: 120.50 ($810m), 134.00 ($711.7m), 132.45 ($706.3m)
EUR/USD: 1.0600 (EU916m), 1.0735 (EU790.9m), 1.0775 (EU777.7m)
USD/CNY: 6.9100 ($557.2m)
USD/CAD: 1.2940 ($485m), 1.4025 ($428.4m), 1.3805 ($402.7m)
AUD/USD: 0.7150 (AUD587.4m), 0.6945 (AUD321.8m)
AUD/USD: 0.7150 (AUD587.4m), 0.6945 (AUD321.8m)
USD/BRL: 5.7000 ($620m), 5.3700 ($577.3m)
USD/MXN: 18.50 ($810m), 19.37 ($371.7m), 18.85 ($350.1m)
NZD/USD: 0.6100 (NZD369.3m), 0.6090 (NZD357m)
Implied volatility setbacks hint at a containment of the banking crisis, but dip buying of shorter dated expiry options flags the volatility risk from impending central bank policy announcements. (RTRS)