What a week this was! First, the collapse of Silicon Valley Bank (SVB) shook the markets global markets, calling into question the credibility of central banks – in particular from Federal Reserve.
After all, the quick and firm action of the Fed while bringing relief, it showed the seriousness of the situation. Fact is that the investors knew that hardly the ascent of the interest rate us U.S from zero to around 5% would leave no victims along the way.
The question is: why has no one seen the problem in the Silicon Valley? To make matters worse, the risk of contagion crossed the north atlantic and went to Swiss Alps. The liquidity problem in the traditional Credit Suisse made the ghosts of the 2008 crisis haunt again.
Thus, the warning signal suggested that it would be more prudent to pause the cycle of tightening interest rates in the USA, digesting the situation in the regional banks. Consequently, the Fed would admit that the “temporary” character of inflation was lost once and for all.
at least the European central bank (ECB) kept a cool head and tightened the benchmark rate by 0.50 percentage points (pp), avoiding an even greater confidence shock. More than that, the BC euro zone made it clear that he remains firm in the fight against high prices.
And now Fed?
These episodes shed light on the events scheduled for the next few days, most notably this month’s Fed meeting on Wednesday (22). After the break of SVBbets are on a new high of 0.25 pp, repeating the dose observed in the last month.
However, until a few days before, a higher dose of 0.50 pp was widely expected. Then the markets not only almost abandoned the chances of further hikes in interest rates USA as also have come to expect Fed cuts later this year.
Maybe that’s why, after an extraordinary week in global marketsyou risk assets ended the period with relative calm. But that doesn’t mean the recent turmoil is over. On the contrary, there are still potential risks of stress, including from a inflation permanent.
Depending on how the situation unfolds, there could be negative implications for the economic scenario. Not least because the collapse of the SVB reflects one of the biggest interest rate hikes in US history, higher borrowing costs and scarce access to credit.
The only ingredient missing from this recipe is a recession. ANDas you move faster and faster into restrictive territory, you naturally have less control over the end result.
After the Fed, there’s still the Copom
In any case, the risks in the external scenario take for granted a change in attitude on the part of the Monetary Policy Committee (Copom), hours after the events involving the Fed. Although the expectation is still to maintain the Selic rate at 13.75%, the market believes that the central bank national will use the communiqué and the minutes to signal the beginning of the cuts soon.
Otherwise, the Copom can install the cases in the markets prices, increasing the volatility of the Ibovespa and the dollar. More than that, the arm wrestling between BC and government tends to return with force.
Even more so after the economic team tried to present the proposal of the new tax framework which will replace the spending cap rule. I.e, if the Copom does not signal a cut in the basic interest rate soon, it would be as if the monetary authority had sworn Fernando Haddad’s (Finance) proposal to death even before it was taken to Congress.
Source: Moneytimes
I am an author and journalist with a focus on market news. I have worked for a global news website for the past two years, writing articles on a range of topics relating to the stock market. My work has been published in international publications and I have delivered talks at both academic institutions and business conferences around the world.
