Markets Grind Higher

businessman going over newspaper

At the close of business last Friday, global equities were marginally higher this past week amid continued market volatility, with European banking stocks falling sharply. Deutsche Bank shares declined more than 13% on Friday morning, trending lower for the third straight day, while other European banks saw their shares fall more than 6%. The yield on the US 10-year Treasury note jumped to 3.62% mid-week before falling back to 3.38%, ending lower than last Friday’s 3.42%. The price of a barrel of West Texas Intermediate crude oil rose to 69.14 from last Friday’s 66.59, while volatility, as measured by the Cboe Volatility Index (VIX), fell to 23.06 from 25.44.



Amid elevated pressures in the banking sector, the US Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank announced a coordinated effort to keep credit flowing in the global financial system. The goal of this agreement is to preserve financial stability and mitigate strains on credit supply to households and businesses.

We expect lending to become more strict, which will have a similar effect on interest rate hikes in slowing economic growth. I believe we will probably see inflation continue to fall significantly in North America and markets are now pricing in interest rate cuts in the second half of 2023.



Our rate of inflation continues to trend downward, falling 5.2% in February, the lowest level in thirteen months.

This coming Tuesday, we will get our Federal Budget and, from what we have heard, we expect continued lavish spending. Our debt servicing cost is currently sitting at $24.5 billion and is expected to increase to $46 Billion by 2028. We can all be assured that this will mean higher income taxes. Of all the expenses that our federal government has, interest on our debt is the fastest growing expense. We hear the new spending will focus on assistance for poorer Canadians, higher healthcare transfers, the new dental benefits program and investments in greener energy. As I stated in last week’s newsletter, we expect to see an increase to marginal tax rates and we are watching the capital gains inclusion rate which currently stands at 50%. There are rumours that this could increase to 75% in order for our central government to pay for these upcoming expenditures.



The Fed, as expected, increased rates by 25 basis points to reach a range of 4.75% and 5%. However, amid the banking-system turmoil, the Fed has taken a more dovish tone, hinting that they may pause sooner than expected.

In the US, First Republic continues to face volatility. Fitch ratings downgraded First Republic’s long-term issuer default rating again, this time to B from BB amid concerns over the bank’s funding and earnings prospects. In search of ways to increase capital, the bank hired J.P. Morgan to advise on strategic alternatives.

Further, on Wednesday, Treasury Secretary Janet Yellen stated that the US Department of the Treasury is not considering providing blanket insurance on deposits without discussing with lawmakers and that the executives responsible for a bank’s collapse should be held accountable. However, she has reassured that the Treasury Department is willing to take actions to protect depositors of smaller lenders if necessary and hinted that the FDIC is looking into the possibility of temporarily raising the deposit insurance cap of $250,000, as a onetime deal, without the need of Congressional approval.



Markets are still digesting the news of UBS acquiring Credit Suisse in an emergency rescue deal brokered by the Swiss National Bank this past week. Swiss regulators made a surprise move to completely write down Credit Suisse’s roughly $17 billion worth of Additional Tier 1 (AT1) bonds. This move unnerved investors in European banks, resulting in a sharp selloff of European banks. Despite the Credit Swiss crisis, the Swiss national bank raised interest rates a half a percentage point.

The Bank of England raised their interest rate a quarter percentage point hike as inflation came in hotter than expected and indicated that they may further tighten if necessary. UK inflation jumped for the first time in four months, rising to 10.4% in February from 10.1% the prior month. As we have stated in our client meetings, the European central bank was much slower than we were here in North America, dealing with rising inflation. As a result, their inflation problem is more severe and we expect Europe continuing to raise rates as we pause here in North America.

In France, President Emmanuel Macron’s highly unpopular pension reforms have been cleared to be implemented after two no-confidence votes failed in Parliament. The opposition is pursuing an appeal to France’s constitutional council to prevent part or all of the pension reforms from going into effect. Although unpopular, this pension reform was absolutely necessary in order to ensure the future stability of pension payments to retirees.



Following purchasing managers’ data, we can clearly see that economies are slowing globally. This past week South Korea reported total exports dropped 17.4% year-over-year in the first 20 days of March amid continued weakness in demand for semiconductors and shipments to China, despite China’s economy reopening. Sales for chips plunged 44.7% and exports to China fell 36.2%.






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