Cracks are beginning to appear in the markets, with Central Banks in focus again focusing on how they will soften the blow of the possible economic slowdown after hiking interest rates quite rapidly in the past year. The movement in the US 2-year bond shows the current uncertainty in the market. The 2-year is trading in anticipation of the US Fed interest rate announcement later today.

US taking strain

Taking a look in the rear-view mirror over the last couple of weeks, we have seen quite a reaction in the market. This is due to the banking crisis currently being experienced in the US and Eurozone. In the US, Silicon Valley Bank filed for bankruptcy, as the current interest rate hiking cycle has caused some banks to run into trouble with the higher-than-expected interest rates. Further, Credit Suisse needed UBS to buy it out after falling foul of the interest rate hikes by the ECB.

The question is whether this is only isolated incidents with banks that didn’t hedge their risks, or whether this will be a systemic problem in banking should interest rate hikes continue. The Fed introduced some measures to protect deposits and other measures to ensure the integrity of the banking system in the US. Only time will tell whether these are isolated incidents or something more serious.

On the other side of the pond, the ECB stuck to its guns and hiked interest rates by 50 basis points, stating that inflation is far too high to start thinking of taking its foot off the hiking accelerator. The euro has been on the front foot in recent trading sessions, although it will not be clear until later today if this is due to the ECB’s bullishness or Fed skepticism. The answer is probably a mixture of both.

Markets unsure about FED

The big news of the week is the FOMC meeting today, with the market expecting the Fed to only hike by 25 basis points given the current market sentiment. While the 25 basis points is priced into the market, the interesting part of the announcement will be the Fed’s expectation for further rate hikes and the probability of a pivot. Markets are sitting on the edge of their seats at the moment, and we can expect swift moves after the decision tonight.

The rand has been trading on the back foot with its emerging market peers for most of the past week. The rand reached R18.6000 in the earlier part of the week, and it seems that the uncertainty in the market and the news of impending recessions around the world have sent investors off to safe havens like Gold. The rand remains undervalued partly due to international events and the risk-premium in the rand to local issues. We expect the rand to remain under pressure, but should the Fed be slightly more dovish in its forward-looking plots, we could see the rand stage a mild recovery.