Monthly Market News March 2023 – Trends in the markets

Alexandre Gauthy - Economist

March was dominated by stress in the banking sector. Equity markets still managed to close on a positive note, while bond yields moved sharply lower. Central banks continued tightening monetary policy unabated.

Our expert, Alexandre Gauthy, analyzes the trends in March 2023.

Equity markets: positive month despite banking crisis

After a strong start to the year, the tide turned in equity markets in mid-March with the collapse of Silicon Valley Bank (SVB) and other regional banks in the US and the bailout of Credit Suisse. Decisive action by the authorities prevented contagion to the entire financial system and overall, the turmoil on equity markets remained limited. At the index level, declines did not exceed 5-6% during the month. Stock markets were still able to close on a positive note in March. Two opposing forces were at work. On the negative side, the banking crisis is expected to cause banks to tighten credit conditions, which will weigh on economic activity and ultimately on corporate earnings. On the positive side, this will at the same time reinforce the disinflationary trend and central banks may not have to go as far in tightening their monetary policy. Markets currently assume that the latter element weighs more heavily.

At the sectoral level, we also see the two factors clearly at play. The stock market indices may have been fairly flat over the month, but the sectoral performances were very different. Cyclical stocks and the financial sector were clear underperformers, while stocks benefiting from lower interest rates, such as the technology sector, significantly outperformed the market average.

Equity markets	December	3 months	Since 31/12	12 moths
MSCI EMU NR	0.7%	12.2%	12.2%	8.1%
MSCI EUROPE NR	-0.1%	8.6%	8.6%	3.8%
MSCI USA NR	1.0%	5.7%	5.7%	-6.7%
MSCI JAPAN NR	1.5%	4.3%	4.3%	-2.9%
MSCI EM. MARKETS NR	0.6%	2.1%	2.1%	-8.5%
MSCI AC WORLD NR	0.6%	5.4%	5.4%	-5.2%
Performances in EUR dd. 31/03/2023				Source : Bloomberg

Bond markets: rush on 'safe' bonds despite high inflation

The uncertain environment for financial markets caused a shift in investor preference towards low-risk investments in March. Equity and bond prices moved in opposite directions for the first time since the start of the inflation crisis. After bond yields rose in February on positive economic data, 10-year yields fell again in March, in the US from above 4% to 3.4% and the German benchmark rate from 2.75% to 2.10%. But for shorter maturities - more in line with expectations for monetary policy - the decline was even more impressive. US 2-year yields fell to 3.8% versus more than 5% in early March.

The trend of lower spreads of corporate bonds in euro was abruptly interrupted in March by a sharp decline in risk appetite among investors. For "investment grade" bonds, spreads of financial corporates moved sharply higher (+75 basis points) during the turbulence surrounding the financial sector in March, almost completely reversing the narrowing of spreads since the October peak. The rise in non-financial corporate spreads remained contained (+25 basis points).

Government Bond Yield 10 yr	Current	March	3 months	Since 31/12
Belgium	2.96	-0.28	-0.27	-0.27
France	2.79	-0.33	-0.32	-0.32
Germany	2.29	-0.36	-0.28	-0.28
Italy	4.10	-0.38	-0.62	-0.62
Greece	4.22	-0.23	-0.41	-0.41
Spain	3.30	-0.30	-0.36	-0.36
United States	3.47	-0.45	-0.41	-0.41
Japan	0.35	-0.15	-0.07	-0.07
Evolution until 31/03/2023				Source : Bloomberg

Central banks: banking crisis brings end to interest rate hikes closer

The Federal Reserve raised short-term interest rates by 25 basis points last month. Fed chairman Powell acknowledged the potential impact on economic activity of stress in the banking sector and hinted at the end of the tightening cycle. The median expectation of Fed members (the so-called dot plot) for this year remained unchanged at 5.1%, implying one more 25-basis-point rate hike. Chairman Powell reiterated that rate cuts are not yet on the cards this year, while market expectations increasingly assume this.

The European Central Bank raised deposit rates by 50 basis points to 3%, while some market participants expected a smaller increase in light of the banking crisis. The ECB gave no indication of future interest rate hikes, which the market interpreted as a more cautious stance. But President Lagarde's statement that "inflation is expected to remain too high for too long" made it clear that policymakers expect the inflation battle is not yet over.

The Swiss Central Bank raised interest rates by 50 basis points to 1.5% to counter renewed inflationary pressures. The SNB indicated that further interest rate hikes are in the offing if inflationary pressures persist.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	4.75-5.0%	+0.25%	Mar. 2023
ECB deposit rate	3.0%	+0.50%	Mar. 2023
Situation on 31/03/2023			Source : Bloomberg

Currencies: temporary dollar strength over

In the month of February, expectations for rate hikes by the Fed had increased again due to some favorable economic data. The dollar strengthened as a result. During the turmoil over the financial sector from mid-March onwards, the dollar could only benefit from its safe-haven status to a very limited extent. The fall in interest rate expectations was clearly more pronounced in the US than in the eurozone. As a result, the dollar resumed its downward trend since October. The safe haven currencies Swiss franc and Japanese yen could only temporarily benefit from investor risk aversion during the banking crisis. Due to Swiss National Bank's swift action, the problems at Credit Suisse and its eventual takeover, had little impact on the currency. By the end of the month, both yen and Swiss franc were unchanged over the month of March. The Norwegian krone continued to perform weakly in March due to weaker oil prices, even as interest rate hikes continue.

Currencies	Current	March	3 months	Since 31/12
USD	1.084	-2.5%	-1.3%	-1.3%
GBP	0.879	0.1%	0.7%	0.7%
JPY	144.09	-0.1%	-2.6%	-2.6%
CHF	0.992	0.4%	-0.3%	-0.3%
Evolution versus EUR until 31/03/2023				Source : Bloomberg

Commodities: gold price approaching 2,000 dollar

Commodities were swept up in the general wave of risk aversion in March due to the banking crisis and the possibility of a recession should the situation escalate. Brent oil prices fell to 73 dollar per barrel during March, the lowest level since late 2021, on fears of a slump in demand. However, in early April, OPEC+ surprised by unexpectedly announcing a production cut of more than 1 million barrels per day from May, while no change was expected over production levels. Although the oil price closed March in negative territory, the OPEC+ announcement pushed it up towards $85 a barrel. Industrial metals also experienced a volatile month but remained virtually unchanged on balance over the month. The recovery in demand from China and low inventories were supportive factors. Gold prices advanced sharply, again approaching the 2,000 dollar per ounce mark. A more moderate interest rate outlook contributed to a favorable environment for gold and uncertainties over the financial sector meant the metal's 'safe haven' characteristics were in demand.