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03.05.202309:11 Forex Analysis & Reviews: US banking crisis not over yet

The US stock market ended Tuesday with a sharp fall due to concerns over the banking crisis. Not long ago, traders shrugged off fears. They supposed that the regulators mitigated the crisis. At the start of the week, Wall Street revived after JP Morgan Chase took over First Republic Bank. However, shares of several regional lenders fell on Monday after the collapse of First Republic Bank, renewing concerns about financial stability. Given that today the Fed is likely to raise the rate at its meeting, the crisis will hardly ease in the near future

Exchange Rates 03.05.2023 analysis

The Fed's recent decision somewhat helped PacWest Bancorp and Western Alliance Bancorp stocks stabilize but this was not enough to boost confidence. Their stocks dropped by at least 15% yesterday. The problems in the banking sector also affected the S&P 500 index which shed almost 2%.

Hedge fund traders also preferred to go short yesterday which forced investors holding long positions to sell.

Investors took notice of recommendations not to buy in such a bear market, especially at the highs. Yesterday, I said that the stock market was overheated and it would be wise to refrain from opening long positions at the highs. On Wall Street, the sentiment may change rather rapidly. This is why investors quickly opened short positions when worries about the banking crisis increased. Risk appetite decreased drastically because of concerns over regional banks, recession fears, and the risks of a default in the US next month. For this reason, traders are awaiting the Fed's rate decision with bated breath.

Market jitters about default are mounting. Analysts wonder whether the Fed should take a pause after the rate increase in May to prevent a more serious economic recession or stick to aggressive tightening to curb inflation.

Judging by interest rate swaps, traders are betting on a 25 basis point rate increase. However, traders believe that the Fed will hardly hike the rate at the next meeting, factoring in rate cuts at the end of the year.

Therefore, the bond market recovered slightly on Tuesday after the sell-off in the previous session. So, 2-year government bonds which are more sensitive to the Fed's rate decisions, fell by 21 basis points, dropping below 4%. The yield on the 2-year Treasury notes for June topped 5% on Tuesday after Janet Yellen warned that the US government could become unable to pay all of its bills on time as soon as June.

As for the technical outlook of the S&P 500, volatility has increased sharply. Bulls need to defend the $4,116 level and push the index to $4,150. If so, a breakout of $4,184 could occur. Bulls also should take control over $4,208 which will boost a bull market. If the price declines due to growing risks of further interest rate increases and recession, bulls will have to fight for $4,116. A breakout of this level could lead to a fall to $4,091 and $4,064.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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