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Note from the MD: Lower terminal rates being forecast by markets

Markets have rapidly readjusted their expectations of the terminal rates for many major world economies in the fallout from the Silicon Valley Bank Collapse (SVB). Forecasts of another 50 basis point rate hike by the Fed later this month have dropped to 40% (down from 80%), and the RBA’s peak is now priced in at 3.9%, down from 4.1%. Traders now place a 72% chance on the Australian central bank holding rates at 3.6% during its April meeting, up from 52% last week.
Markets have rapidly readjusted their expectations of the terminal rates for many major world economies in the fallout from the Silicon Valley Bank Collapse (SVB). Forecasts of another 50 basis point rate hike by the Fed later this month have dropped to 40% (down from 80%), and the RBA’s peak is now priced in at 3.9%, down from 4.1%. Traders now place a 72% chance on the Australian central bank holding rates at 3.6% during its April meeting, up from 52% last week. The US government stepped in to guarantee SVB deposits above the legislated US$250k threshold earlier this week. While it didn’t do much to tame markets immediately, new inflation data overnight pushed all American Index’s to close sharply higher. US CPI for February came in at 6%, and the Dow Jones finished +1.06%, S&P 500 +1.68% and the Nasdaq +2.14%. Investors have rushed into gold in droves, pushing it back above US$1,900/oz in the spot market and August futures also punched through US$1,950/oz. The safe haven asset has held up over the past few days, and the ASX All Ordinaries Gold Index is up over 6% this week. The US Dollar Index has edged back around 2% in the same period of time, leaving the precious metal as the preferred asset of the two as a hedge against volatility. Various technology companies around the world have exposure to SVB. In a welcoming sign for large depositors, reports of clients being able to access their deposits are now surfacing. Life 360 (ASX: 360), who holds $6.1 million in deposits with SVB, has regained access to its funds and is now transacting normally. APRA, ASIC, Treasury and the RBA have all released statements reaffirming that Australia’s banking system remains strongly capitalised and highly liquid.  The XJO has opened higher this morning after falling steeply over the last four days. With this recent drop Volatility has spiked higher and is now at 3 months highs and an IV rank of 37. This reversal happened to be at strong support at the 200-day moving average (7007.9). We still see support at 6,946, which was recently tested and confirmed with Tuesday’s low of 6,950. The first minor resistance level of 7,224.8, before the next major resistance level at 7,558, just below the XJO year’s high of 7,567.70.  Regulators have begun targeting Australia’s top end corporations for ‘greenwashing’ – when companies provide misleading or false information in their Environmental, Social, and Governance (ESG) reporting – with Mercer Super most recently appearing in ASIC’s crosshairs. One fund manager who has been preparing for scenarios like this one and expects ESG investing to flourish over the coming years is Jai Mirchandani, Founder and Portfolio Manager at ELM Responsible Investments. Jai will be joining us this Friday, 17th March at 12pm (AEDT) for The Insider: Meet the Fund Manager webcast where he’ll share insights on finding the right balance between delivering a positive impact while realising investor returns. He’ll also discuss his three favourite stocks of the moment, why the current macro environment breeds favourable conditions for ESG investments and more. To join us for this session, click here. Past performance is not a reliable indicator of future performance.
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