Fed meeting starts, Nike earnings, Xi in Moscow – what’s moving markets

(C) Reuters

By Geoffrey Smith

Investing.com — The Federal Reserve starts a two-day meeting at which it will have to decide whether financial stability risks trump inflation risks. Bank stocks recover in Europe and the U.S. as the shock of Credit Suisse’s abrupt demise recedes. Stocks more broadly are set to open higher on relief about the banking sector. Nike reports earnings after the close, and in Moscow, the Russian government is likely to press Xi Jinping with its war effort, while also paying lip service to his peace plan.

Here’s what you need to know in financial markets on Tuesday, March 21st.

1. Fed faces price stability vs. financial stability dilemma

The Federal Reserve starts its two-day policy meeting with markets still very much on edge after three weeks of increasingly severe financial instability on both sides of the Atlantic.

Some analysts, such as Goldman Sachs, believe that the collapse of three U.S. banks and increasing signs of stress in the mortgage-backed securities market will force the Fed to at least pause its policy tightening, while others warn that inflation and the labor market are still running too hot to allow that luxury.

The pressure on mid-size regional banks appeared to ease a little on Monday, with most stocks rising. The main outlier and cause for concern remain First Republic Bank (NYSE:FRC), which fell another 47% after its credit rating was downgraded by Moody’s and Standard & Poor’s, on the risk of continued deposit outflows.

First Republic staged a modest bounce in premarket after The Wall Street Journal and Bloomberg reported work afoot for a more durable solution to its woes, both in government and private circles.

2. Bank stocks rebound as Credit Suisse aftershocks ease

Global markets recovered their poise after the shock of Credit Suisse’s hasty forced marriage to UBS at the weekend. European bank stocks, in particular, extended the recovery they had started on Monday after regulators clearly stated that they would not copy the Swiss approach of imposing losses on additional Tier-1 capital before shareholders. ECB banking supervision head Andrea Enria has two speaking opportunities later to calm nerves further.

The Swiss move – while legal – was seen as violating the spirit of the Basel III banking reforms and ensured that bondholders were more inclined to support legal challenges to the deal on other grounds.

The Swiss government had hastily written new legislation to avoid having either bank’s shareholders veto a deal that it saw as vital to national interests.

3. Stocks set for higher opening; existing home sales, Nike earnings due

U.S. stock markets are set to open higher, as fears of an immediate banking crisis subside.

Regional bank stocks, such as PacWest (NASDAQ:PACW), Western Alliance (NYSE:WAL), KeyCorp. (NYSE:KEY), Comerica (NYSE:CMA), and Zions (NASDAQ:ZION) are all up by as much as 3% in premarket trading, helped by a Bloomberg report that the Treasury is looking at ways to extend insurance to all deposits, at least temporarily, removing the main driver of the recent instability.

By 06:45 ET (10:45 GMT), Dow Jones futures were up 244 points or 0.8%, while S&P 500 futures were up 0.6% and Nasdaq 100 futures were up 0.3%.

Existing home sales top the day’s data calendar, and housing-related data may generate some added interest, given the concerns about concentrations of mortgage-backed securities on some bank balance sheets.

Nike (NYSE:NKE) reports earnings after the close.

4. Putin “ready to discuss” China’s Ukraine peace proposal as Xi continues visit

Russian President Vladimir Putin told his Chinese counterpart Xi Jinping he was ready to discuss Beijing’s 12-point peace plan for Ukraine, but without indicating where he may be prepared to compromise.

Xi’s plan includes calls for respecting the sovereignty and territorial integrity, something hard to square with Russia’s unilateral annexation of four Ukrainian regions last year (in addition to the annexation of Crimea eight years earlier). The Ukrainian government, on Monday, reiterated its call for Russia to withdraw its forces.

Xi began the second day of his visit with talks with Prime Minister Mikhail Mishustin, which agencies said would concentrate on the important economic ties between the two. A key issue is likely to be the supply of Chinese military or dual-purpose goods to shore up its war effort, which Moscow is understood to be pressing for, but which China has so far been reluctant to give.

5. Crude bounces as economic concerns ease; API due

Crude oil prices came off their lows as the near-term outlook for the banking sector improved, easing concerns about an economic slowdown later in the year.

By 06:55 ET, U.S. crude futures were up 1.1% at $68.53 a barrel, while Brent futures were up 0.9% at $74.42 a barrel.

The market was also supported by comments from the CEO of Trafigura, one of the world’s largest traders, saying that there is “not much downside from here” given the unresolved issues on the supply side of the market.

The American Petroleum Institute publishes its weekly estimates of U.S. inventories at 16:30 ET, as usual.