Beyond contagion risks in the banking system, the focus is now squarely on spillovers in the form of economic growth risks, which could wreak havoc on the global economy as lenders tighten loan protocols. Pro-cyclical sectors like Energy are getting hammered as oil prices flounder.
The drag on growth from a housing pullback may have peaked, but it's hard not to expect the housing market pullback in most major economies to persist. Yet another wealth erosion, the economy and markets will need to factor.
Despite the front-end reset and calls for a Fed cut, global markets remain "in a world of hurt" as recession risks rise, and we still may see that dash for dollars if this keeps up.
FOREX
The combination of a still-strong macro backdrop and risks around the banking system has made the Fed's path highly uncertain from here. And with the market packing in a higher US domestic contagion risk, the Dollar has suffered as rates market re-price a lower Fed glide path and even a possibility of a pause. But the Dollar downside could be limited from here either because a banking crisis would trigger a sharp global risk-off benefitting the Dollar due to its safe-haven status and if systemic risks fade and the focus shifts back to the Fed's inflation fight. Indeed the market stress test is on a collision course with CPI inflation later today.
The market reaction to a hotter-than-expected CPI should be a tell
OIL
Oil prices are caught in a whipsaw of global financial contagion risk. The bigger worry in cross-asset sentiment is that the spillover from US banking stress could lead worldwide banks to curtail lending to the real economy and therefore tighten broader financial conditions, amplifying the growth drag already underway. One way or another, global consumer confidence will take a significant hit, which usually squashes any upcoming travel plans that involve planes, trains and automobiles.
GOLD
Gold investors backed up the truck yesterday on the premise the Fed will have little option to ensure that ample Dollars are in the system event against the backdrop of sticky inflation. With real yields toppling, gold was in vogue.
Even though gold would likely fare exceptionally well in broader bank stress scenarios, the "insurance premium" is getting a little expensive, given the uncertainty around the FED's actual reaction function.