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  • Weekly Summary: ECB Is Heading Towards a Downfall, Giving Way to the Fed

Weekly Summary: ECB Is Heading Towards a Downfall, Giving Way to the Fed

This trading week was extremely volatile with historic monetary policymakers’ decisions and a raging banking crisis. Still, the S&P 500 broad market index is ending the week on the positive side, up by 2.5% to 3970 points.

The banking crisis is widening as First Republic Bank, the 14th by assets in the United States, and Credit Suisse, the second largest banking institution in Switzerland, joined the underdogs in the global banking sector. Both European and U.S. monetary regulators are keeping the situation under control, but the situation now is frighteningly similar to that of the Great Financial Crisis in 2008-2009. The real difference is that monetary regulators were less inclined to flash taxpayers’ cash around with such speed and ease back then. Otherwise, we could have already witnessed a chain reaction of collapses and market plunge this week.

It seems that there are no moral limits in place as both Credit Suisse and First Republic Bank were swiftly supported with $54 billion by the National Bank of Switzerland and with $30 billion from the pool of American banks respectively. The most striking aspect about this situation is that these measures, at least in principle, match those that were undertaken in 2008. Fannie Mae and Freddie Mac, U.S. government sponsored mortgage associations, have been taken over by Federal Housing Finance Agency (FHFA) amid a raging housing crisis just a few week, ahead of the collapse of the Lehman Brothers and a 40% crash of the stock market. This time Silicon Valley Bank (SVB) and Signature Bank (SB) have been nominated for this role as they were taken over by the Federal Deposit Insurance Corp (FDIC). There is no proper candidate for the role of Lehman Brothers so far. Credit Suisse could be a nominee, but its troubles were well known long before its fall and came in no surprise. So, we must wait for an unexpected name to emerge for this villain to initiate a crisis scenario similar to that of the one in 2008-2009. Even First Republic Bank is playing a role in the crisis scenario as it was saved by the pool of American banks led by JP Morgan. It was the same JP Morgan that saved Bear Stearns back in 2008.

The European Central Bank (ECB) has bravely raised interest rates and will continue to do so as it did just before the stock market collapse in 2008. A horrible hair-raisin coincidence that is pushing both American and European investors to get out of the banking sector and move their funds to money funds despite the generous support given to the battered banking institutions. The important part is that U.S. Congress should raise the national debt ceiling in May or June, otherwise U.S. Treasuries will become a real bloodbath for investors.

It is hard to say what decision would be sound for the Federal Reserve (Fed) in this situation. Maybe there is none. If the Fed does pause its interest rate hike during its meeting on March 22, this could be interpreted as acknowledgement of huge troubles in the banking sector and give markets a real reason to panic. It rates are raised by 25 basis points, the Fed may win some time, maybe two or three weeks, until banging sector troubles grow to the point that they can no longer be solved without quantitative easing solutions.

Technically, the S&P 500 index continues to move within a downside formation with targets at 3650-3750 points. The index is below the strong support level of 3970-3990, but the support levels could move down to 3890-3910 points next week, while the resistance could be raised to 4000-4020 points.

Oil prices confirmed a downside breakthrough of the wide trading range of $79-89 per barrel of the Brent crude benchmark. Recession logic suggests that prices may decline towards $40-60 per barrel. Russia and Saudi Arabia were reported to negotiate on possible actions to stabilise the market, but they will hardly succeed if recession expectation is strong. It would be better to support prices gradually to prevent a steep drop.

Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices broke through the resistance level of $1890-1900 per ounce amid a shocking quake in the U.S. banking system and the widening fears of a possible banking crisis. If prices fall below $1910 per ounce this week, a new testing of the support at $1790-1810 per ounce will be possible. Otherwise, we may witness a move towards all-time highs within coming months.

The U.S. Dollar may continue strengthening, but it will largely depend on incoming inflation data. Considering high volatility in the market, it is better to place orders attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered attractive. The decline of the EURUSD to 1.05000-1.05500 could be used to close half of the trade, and the other half should be continued until the targets of 1.03000-1.03500 are met.