Market Update

This past week, financial markets experienced significant fluctuations across all assets, with tensions remaining high due to the recent downfall of Silicon Valley Bank (SVB) in the US.
Swift interventions by governments or central banks can usually mitigate such negative ripple effects. For instance, drawing lessons from the 2008/9 global financial crisis, the US government assured that all SVB deposits would be secure and accessible. Similarly, in Switzerland, the Swiss National Bank stepped in with a loan for Credit Suisse to counter the crisis of confidence that led to its shares plummeting.
Regrettably, while these measures should ideally curtail further negative spillover, it's evident that heightened volatility will dominate the headlines in the coming weeks.
In other developments, the ECB opted for a 0.50% hike in Eurozone interest rates. Although market jitters would have suggested a steadier approach, prior commitments by the ECB to raise rates in their March meeting left them with limited options.
The ECB defended this decision by distinguishing financial stability concerns (related to the banking sector) from price stability ones (pertaining to inflation). Yet, it's essential to recognize that central bank policies do influence the banking industry. In our view, the ECB should have prioritized immediate concerns, particularly the banking sector's broader economic implications. Furthermore, one must question if inflation is as dire as often projected. We've consistently posited that UK inflation will see a sharp decline this year due to base effects, possibly even falling below the BoE's 2% benchmark by year-end. Supporting this view, the Chancellor of the Exchequer, Jeremy Hunt, recently announced during the Budget that the OBR projects the UK's CPI inflation to conclude the year at 2.9% (from its current 10.1%).
Moreover, diminishing commodity prices will aid in suppressing inflation. For instance, the price of Brent Crude Oil witnessed a drop of over 10% this week. Additionally, the US PPI data for 15 March 2023, indicative of wholesale inflation, was not only below market predictions across all primary metrics but also saw substantial revisions to past figures, hinting at alleviating inflationary pressures.