Nervous Investors Brace for More Turmoil in the Banking Sector

The collapse of two U.S. lenders earlier this month and the forced takeover of troubled Credit Suisse by rival UBS has left investors worried about more unpleasant surprises in the banking sector. The aggressive rate hikes by the Federal Reserve over the past year have added to the uncertainty. The recent decline of Deutsche Bank's shares and the surge in the cost of protecting against a default on its bonds have only added to investor anxiety. As the market is very nervous, investors are looking for stability in the banking sector, but they are also aware that other unpleasant surprises could be lurking.

Looking Ahead to Q2: From Equities Rush to Market Volatility

The first quarter of 2023 was marked by a rush into equities for the first month of the year on record. Investors loaded up on stocks, while the threat of inflation seemed less severe, and the economy appeared robust. However, as the quarter draws to a close, market volatility has spiked with a slew of crypto companies collapsing, U.S. regional banks stocks tanking in the wake of Silicon Valley Bank collapse, and Credit Suisse imploding, raising concerns of a 2008-style frenzy. The Fed Chair warned that banking stress could trigger a credit crunch with significant implications for a slowing U.S. economy.

U.S. Data, Eurozone Inflation, and China PMIs

Investors will be keeping an eye on upcoming U.S. data to see how much the market turmoil is making a recession more likely. The core PCE price index, the Fed's favored measure of inflation, will be released on Friday. It accelerated in January, adding to concerns over the prospect of a more hawkish Fed. Other reports include data on consumer confidence, pending home sales, revised GDP, and initial jobless claims. Several Fed officials are also due to speak during the week, including Fed Governor Philip Jefferson, Boston Fed President Susan Collins, Richmond Fed President Tom Barkin, and governors Christopher Waller and Lisa Cook.

The Eurozone will release inflation data on Friday, and while headline inflation is expected to slow, the underlying rate of inflation is expected to accelerate. The banking crisis has prompted fears that lending will slow, acting as a drag on the economy. Investors will be on the lookout for any indications from policymakers, including ECB President Christine Lagarde, on how they are viewing the inflation threat amid ongoing turmoil in the banking sector.

Chinese PMI data on Friday will be closely watched as market watchers try to gauge the strength of the recovery in the world’s second-largest economy in the wake of the lifting of pandemic restrictions. In Japan, Tokyo inflation data on Friday will be in the spotlight - the report is expected to show that inflation topped the Bank of Japan’s 2% target for the tenth straight month. Expectations are high that incoming BOJ Governor Kazuo Ueda will oversee the unwinding of yield curve controls and negative interest rates during his tenure after a decade of unprecedented stimulus by his predecessor.