Markets stabilise after stress in the financial sector

March was a month of high volatility due to uncertainties and fears of a potential banking and confidence crisis in the financial sector following the liquidation of several US regional banks and the contagion of the sector in Europe, which ended with the acquisition of Credit Suisse by UBS, although the main stock market indices managed to end the month in positive territory.

Statements by the monetary authorities supported the banking sector and eased fears of a new banking crisis. For example, ECB President Christine Lagarde said that the ECB would do whatever was necessary and that the institution was fully prepared to provide liquidity support to the financial system if needed. For its part, the Federal Reserve came to the defence of the banking sector and, in particular, the customers of the liquidated institutions; in return, it provided liquidity to the institutions by easing and relaxing the conditions for access to 90-day loans.

It was in this volatile environment that the central bank meetings took place, which did not disappoint initial expectations, and raised interest rates as planned. The European Central Bank raised its deposit rate by a further 50 basis points to 3%. The following week it was the Federal Reserve’s turn to hike it by 25 points to a range of 4.75% – 5.0%, with a reassuring message from the Fed Chairman that it would provide all the liquidity needed this year.

The Eurozone’s annual inflation rate was 8.5%, down a tenth of a percentage point from the previous month. The most negative tone came from the underlying data, which excludes the more volatile items such as energy and fresh food, which rose to a record high of 5.6%. Both figures are far from the Central Bank’s 2% inflation target.

In terms of macroeconomic conditions and forecasts, both the US and the Eurozone are expected to experience weak growth in 2023. The risk of recession has been exacerbated by Central Banks’ monetary policies aimed at bringing inflation down to target in a sustainable manner, and by the financial crisis.

As for China, after weak growth in 2022 due to the zero COVID policy, challenges in the property sector and higher commodity prices, growth is expected to improve from now on due to policy support and the reopening of the economy. However, the risks of a slowdown in exports due to weaker global demand need to be taken into account.

With regard to commodities, the month saw a rebound in Brent crude oil prices, which rose to high levels, although they closed below the high for the month. Crude oil rallied during the month on expectations of improved demand from China. There were also rumours, later confirmed, that OPEC might cut production.

The Euro was also volatile, with the currency fluctuating between 1.0545 and 1.0905 against the dollar, ending the month at 1.0839.