Investors seem to not believe central bankers, as stock markets are sliding down. The S&P 500 broad market index is losing 0.8% and heading towards 3893 points, Brent crude prices are hovering around 18-month lows at $70.20 per barrel, while gold and Bitcoin are gaining around 1%.
Central bankers have tried to do everything to calm down markets and eliminate all possibilities of a banking crisis. UBS was led to buy toxic Credit Suisse and promised to extend a $100 billion credit line to save the second largest Swiss bank. The Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England, the Bank of Japan, the National Bank of Switzerland, and the Bank of Canada agreed to bolster cash flows by offering daily swaps with other major banks, at least by the end of April.
The Fed has also introduced other measures, including the new Bank Term Funding Program (BTFP), to stabilise the financial situation and to allow investors to resume risky asset buying. However, investors do not want to dip into risky assets. Elevated volatility in the markets is revealing to central bankers that investors could no longer take any further rise of interest rates. Additional liquidity will hardly solve this problem, and it may even lead to rising volumes of ineffective financial operations. Markets need a structured solution that is only possible with the lowering of interest rates.
The hawkish decision of the ECB, that raised interest rates by 50 basis points last week, has already been priced in and has not lead to extra volatility. The Fed interest rate decision this week may be viewed differently amid flaring troubles surrounding the banking sector. If the Fed raises interest rates by 25 basis points, and continues to assure markets of stability in the banking sector, investors may have no choice but to initiate a major sell-off to force the Fed to change its hawkish course. Perhaps, that is what the Fed wants to bring down inflation. If so, sell-offs may turn into a major market meltdown.
Technically, the S&P 500 index continues to move within a downside formation with targets at 3650-3750 points. The index returned to the support level of 3890-3910 points. The nearest resistance is 4000-4020 points. If the support fails, the index may fall towards the primary target at 3650-3750 points, even before the Fed meeting on March 22.
Oil prices confirmed a downside breakthrough of the wide trading range of $79-89 per barrel of the Brent crude benchmark, and quickly dropped to $72 per barrel. Recession logic suggests that prices may decline towards $40-60 per barrel. The Organisation of Petroleum Exporting Countries and its allies (OPEC+) will only meet at the beginning of April. So, there seems to be nothing to support prices, as the Fed could hardly be expected to make a U-turn in its hawkish monetary policy.
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. Prices have already reached the target and are likely to tumble before they can resume climbing towards extreme targets at $2400-2500 per ounce. It is better to wait and see how the situation evolves.
The U.S. Dollar may continue strengthening, but it will largely depend on the Fed’s decision. 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. It is likely the Fed will help to move towards these targets this week.