The recent bank collapses spooked markets, investors, and governments.
Many expected central banks to sacrifice their determination to defeat inflation and turn their attention to underpin financial stability. This of course was proved wrong at recent central bank meetings where rates were again raised. Investors again underestimated the central banks’ resolve to defeat inflation, whatever the cost.
The fact is, although three banks failed and two more needed rescuing, this was never the beginning of a collapse of the banking system. Each was independent of the others, with two focused very much on crypto and tech. If anything, it was poor management and the weakening of regulations under Trump’s presidency that allowed some of this to happen.
That said, we do need to keep one eye on Deutsche Bank!
US interest futures
Yields dropped as investors sought an exit from banks and there was a little irony in the fact Bitcoin became the digital alternative to Gold and rallied to $28k. Stocks understandably dropped, especially the banking sector, and the USD was down then up as traders attempted to decipher what it all meant. US interest futures rallied on the expectation the Fed would cut rates in September and December and in doing so now offers some great opportunities.
These have become my focus. I have traded US Interest rates for over 20 years and saw some great strategies materialising to buy June/Sep and June/Dec futures.
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Although rates are nearing their peak, I expect they will remain there at least until the end of 2023 as central banks are still a long way from their 2% inflation target. I believe they could temporarily increase their target inflation rate to 3% to remove some of the pressure.
Bear in mind, it is possible that central banks will overshoot with their rate hikes as they are not allowing sufficient time for the economy to react and for it to feed into the data. After all, the effect is likely to be lagging by several months.
Even when inflation does reach 2%, we should not expect rates to drop straight away. I expect central banks will want to see them hold for three to six months. Not only that, but very low rates are reserved for a crisis, and although the recent banking chaos was close, it will take more for central banks to begin to cut rates. It’s possible that for the next crisis (yes there will be one) they will be more reluctant to drop rates so quickly or so low. Cheap money may not return this decade!
