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US authorities engineer rescue of First Republic’s assets and depositors

First Republic Bank, a US Commercial Bank with headquarters in San Francisco, was put into receivership by the FDIC (Federal Deposit Insurance Corporation), and its assets and deposits have been acquired by JP Morgan for $10.6bn. By the end, First Republic had a market capitalisation of under $700m, down from a peak of over $37bn in Q4 ’21. This latest in a succession of regional banking problems, has not spooked the financial markets in the same way as the problems with others have. But the solution has not calmed markets either, with the KBW Bank index still trading close to its March lows. Attention switches now to whether the Federal Reserve’s decision will be affected by this latest bout of market concerns, or if the focus remains on the fight to bring inflation back under control? 

US and Euroland central bank meetings in focus this week ahead of US April non-farm payrolls

The Federal Reserve is first out of the gate in terms of the two major central bank meetings this week. The markets are prepared for a 25 basis-point increase in the targeted Fed Funds rate, and should have been well prepared by the commentary from Fed President and Board members alike over recent weeks. The only question will be whether the Fed then signals a pause in tightening. I don’t think it’ll go that far, but it may signal that the macroeconomic bar for additional tightening has been raised higher. The European Central Bank then decides whether to increase the refinancing rate by 25 or 50 basis-points. I think it’ll opt for the former, choosing caution over activism. With markets pricing in slightly more than this, the risks are that the EUR slides a little in the aftermath of the decision. 

After the central bank decisions are done for the week, the attention will switch to the April employment report from the US, due to be released on Friday. Will the non-farm payrolls figures record another solid outturn, or will the weight of economic problems be much worse than expected? The risks are that the data, which has so far been fairly positive, swiftly turns negative, and that could prompt so further short-term USD weakness. However, other currencies are struggling to maintain their strength given the weight of economic problems they have. 

Has the latest GBP and EUR test higher petered out again?

Another US bank has been forced into receivership, the US data and surveys point to a much weaker macroeconomic picture, and even the jobs data could be on the turn. So why haven’t either the pound or the euro capitalised on this? Sure, last week saw EURUSD rise to fresh 13-month highs, and GBPUSD hit a 10-month high, but neither move was sustained, and both quickly slipped back. Is the problem that no economy appears to be performing well? That markets expect the issues dogging the US financial system to spread? Is it growing geopolitical risks? Or a lack of USD liquidity? These are some of the reasons put forward each time the GBP and EUR slip back after a new attempt higher. 

I think there is another factor at least in part responsible, and that’s the downturn in global trade activity. 2022 saw significant stockpiling of goods by businesses, fearful of a return of supply-side shortages. Thus far, these haven’t occurred and so those same companies are looking to reduce their overhang of stock, which may take many months to complete, especially if the global economic outlook worsens from here. 

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