A testing week
Markets so far have largely endured the admonitions coming from significant figures within the world of finance. The Bank of England’s own Andrew Bailey’s warnings of the risks of a market crash were uncommon for an MPC chair and initially took markets aback. Shortly thereafter, prominent figures warned of a pre-Halloween fright from vulnerable US credit institutions. The latter warnings are fresher and worth unpacking further as developments on this front likely remain the key driver for EURUSD alongside tariffs.
Last week warnings from US regional banks, Western Alliance Bank and Zions Bank, sent US financial stocks tumbling. Investors sent non-financial US equities lower too. After all, as history has proved time and time again, credit crises can precipitate financial and economic crises in turn. So, disturbances even seemingly small should not be overlooked. What spooked markets further were warnings from prominent financial figures, not least amongst whom was JP Morgan CEO, Jamie Dimon. He said, ‘when you see one cockroach, there are probably more’, implying further credit risks could materialise.
As a result of the importance of such developments, this story hasn’t remained isolated to the equity market. It has definitely spilled into fixed income and FX with the Dollar’s move lower inextricably linked to concerns of souring financial market conditions. As the week progresses, market confidence is slowly returning. The Fed looks set for a 25-basis point cut next week barring any surprises from the belated CPI report this week. Cutting will ease credit conditions, but it is clear the market will be swift to punish equities and the Dollar in turn should any signs of faltering lenders materialise.
Discussion and Analysis by Charles Porter
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