Shockwaves in the US Banking Sector Reach Europe – DAX Plunges Out of Sideways Range

Jürgen Molnar, Capital Market Strategist RoboMarkets

17 March 2023

In the past week, positively formulated, there was finally a little more movement in the markets, but unfortunately for all long-positioned investors it led in the wrong direction. After the shock waves from the US banking sector reached Europe with Credit Suisse and concerns arose about a next financial crisis à la Lehman, the DAX fell like a stone from its week-long sideways range back to the support at 14,650 points, where it turned back upwards for the time being.

Banks Desperate for Liquidity

Until a week ago, bank shares were still very popular with investors because of the interest rate fantasy, but today almost no one trusts them anymore. Although the assurances from the political side as well as the rescue operations of the banks among themselves can take some pressure off the kettle for the moment, the latter in particular show that the situation is probably somewhat more dramatic.

But the latter in particular show that the situation is probably a little more dramatic than one would understandably like to appear to the outside world. This fits in with the record amount of almost 153 billion US dollars that the banks borrowed from the Federal Reserve’s so-called emergency liquidity supply in the week ending 15 March. In the previous week, it was just 4.5 billion and at the height of the financial crisis “only” 111 billion US dollars.

Central Banks Between Monetary and Financial Stability

The stock market world has thus turned 180 degrees in the past seven days. The winners of the turbulence in the financial sector are the technology stocks. The fear of a tightening of the Fed’s pace in terms of interest rate hikes next week has already turned into renewed hope for an interest rate cut among some market participants.

With the decline from 6.4 to six percent in February, inflation in the US is at least moving back towards normal, but there is still a long way to go before the central bank reaches its target of two percent. So next Thursday, the Fed will have to choose between monetary stability and financial market stability. However, the big rate hike of 50 basis points has been off the table since this week at the latest.

No rate hike would certainly exacerbate the uncertainties about the true situation in the financial sector. This is another reason why the European Central Bank is likely to have stayed on course with its half percentage point increase. A small upward interest rate step would thus be the consensus for the Fed that all parties can live with; anything else would be a surprise.

US Technology Index Nasdaq Ends the Week With a Plus

With the prospect of central banks now shifting to a slower pace on interest rates, investors are shifting their portfolios – into tech, out of banks. And since the DAX is not so technology-heavy, which has been to its advantage in recent months, it is now lagging behind Wall Street. The 14,650 point mark has held for the time being, which in combination with the recapture of the round 15,000 mark initially provided reassurance.

In the coming week, a new trading range could be established below 15,250 points, depending on how the situation in the financial sector develops. The alarm bells could ring again at any time and another institution could cry out for help.

FED Meeting on Wednesday, BoE Follows on Thursday

And investors beware: Next Wednesday, the US Federal Reserve’s interest rate decision will already be on the ticker at 7 p.m. due to the postponement of daylight-saving time. On Thursday, the Bank of England will follow at the usual hour of 1 pm with its comments on future monetary policy.

DAX – Current Supports and Resistances

Supports: 14,850/14,800 + 14,700/14,650 + 14,450/14,400

Resistances: 15,050/15,100 + 15,200/15,250 + 15,400/15,450

This article is from RoboMarkets.