Yesterday’s Federal Reserve (Fed) decision was relatively hawkish - depending on where you are coming from (I am coming from a bank crisis).

The Fed raised the rates by 25bp, as broadly priced in, but Fed Chair Jerome Powell signaled that there would be another 25bp hike on the wire before this tightening cycle ends. QT and dot plot were unchanged.

Stocks fell, while Treasuries rallied as a sign that not everybody interpreted the Fed decision equally dovish, or hawkish.

US futures are in the positive at the time of recording. It is well possible that the post-FOMC equity selloff quickly reverses, at the falling yields is supportive of equity valuations – if financial stress is contained and economic data is not too bad.

In the FX, the dollar’s sharp fall led to a strong rally in the EURUSD yesterday.

Cable rallied as well, after the latest inflation report fueled the bets that the Bank of England (BoE) has no choice but to hike its policy rate at today’s MPC meeting.

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It looks like the Federal Reserve (Fed) will announce its latest monetary policy decision to a public with relatively calmer nerves compared to a few days ago.

The VIX index eased sharply from last week’s levels on bank relief, gold tanked to $1935 per ounce and indices on both sides of the Atlantic Ocean were comfortably higher on Tuesday.

The pressure on US treasuries eased, as well, and the US 2-year yield is now around the levels it was before Fed President Jerome Powell’s speech to the Senate which spurred the expectation of a 50bp hike for week’s meeting.

But, even though activity on Fed funds futures looks like it finally is pointing at a solid-ish consensus that the Fed should hike rates by 25bp today, no one really knows how much importance the Fed will assess to the latest banking stress, which, in reality, resulted in an uptick in Fed’s balance sheet due to additional liquidity, but which also tightened the financial conditions sharply.

The chances are that the Fed hikes by a final 25bp to stick to their promise to bring the US interest rates to around 5%. But we could certainly forget about a further advance to 5.5-6%.

For equities, a softer Fed and unexpected liquidity is supportive in the short run. For currencies, a dovish Fed would mean a further depreciation of the US dollar across the board.

But all that is dependent on how hawkish/dovish the Fed will sound. And the truth is, a Fed decision has barely been this uncertain.

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Bank stocks had a volatile session on Monday. UBS lost up to 16% after the Credit Suisse deal, but closed the session more than 1% higher.
In the US, JP Morgan, Goldman Sachs and Morgan Stanley closed the day with 1 to 2% of gains. The regional US banks also had a calm session, except for the First Republic Bank - which plunged 47% after a second credit downgrade in just a week from S&P.

In bonds, the announcement of full write-down of Credit Suisse’s AT1 bonds got bond investors confused, as equities should be written down before any other paper in the ‘bonds’ category. Authorities said that equities will be written down first to end confusion.

The Federal Reserve (Fed) begins its two-day policy meeting today in the middle of a storm.

If the European Central Bank (ECB) decision serves as a cheat sheet, the Fed could hike by 25bp and say that it has tools to inject liquidity in the system to contain crisis.

Investors are also focused on what the Fed will do with the Quantitative Tightening (QT),

This morning, activity on Fed funds futures assesses a 75% chance for a 25bp hike.

The US dollar index slipped below the 50-DMA yesterday on expectation that the Fed will stay cautious at this week’s meeting given the turmoil across the financial place, while gold traded above the $2000 psychological mark on Monday, but improvement in sentiment could rapidly pull the price of an ounce to $1900 mark.

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UBS bought Credit Suisse (CS) in a government-brokered deal for 0.76 cents of franc per share, or CHF3bn in total.

US dollar weakened and US futures opened in the positive but reversed losses while the Japanese Nikkei fell 1.42%, Hang Seng dropped more than 3%. HSBC lost 7%.

The next few hours of trading will give us a better picture on whether the crisis is contained. In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis – which doesn’t concern UBS - a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB and the government.

This week, investors will watch the Federal Reserve (Fed), Swiss National Bank (SNB) and Bank of England (BoE) decisions, after the European Central Bank (ECB) hiked rates by 50bp pointing at inflation looking ‘too high for too long’.

Bank stress benefited to Bitcoin and technology stocks, but not to crude oil.

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The European Central Bank (ECB) announced a 50bp hike at yesterday’s policy decision pointing at inflation expected to remain ‘too high for too long’.

The ECB decision came as a hint that the Fed could also play down stress in banking sector, highlight that the liquidity issues could be addressed with available tools and keep focus on economic data.

At the wake of the ECB decision, activity on Fed funds futures gives more than 80% chance for a 25bp hike. This probability was around 65% before the ECB’s decision.

Here is a couple of lines about what the ECB decision means for the Fed expectations for next week’s FOMC meeting:

https://medium.com/swissquote-education/if-ecb-is-any-indication-the-fed-should-continue-hiking-next-week-abc4b75af6db

In the markets, the US bond markets are now licking the past week’s wounds. The US 2-year yield is up but remains well below the pre-SVB collapse levels. BoFA’s MOVE index, which is the implied treasury volatility, hasn’t been this high since the 2008 subprime crisis, which calls for caution.

Relief on bank front sent stocks higher, and Bitcoin is up by more than 30% since last week.

Will the joy last? We will see, but a 4, 5, 6, 8% jump in stock prices is a sign that volatility is threatening and calls for caution.

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