Author: Fan Zhijing ▪ Ge Weier

Credit Suisse, Switzerland's second-largest bank, plunged on Wednesday amid fears of risk release in Europe's banking sector, with the sell-off spilling further down the stock market to commodities.

International oil prices fell to a 15-month low, and industrial metals generally fell by more than 3%. Recession fears have scared money, and the potential risk of recession has put central banks' resolve to fight inflation to the test.

The market is concerned about the spillover of risks in the banking sector

After the Silicon Valley bank thunderstorm, European banking risks on the other side of the ocean exploded as Credit Suisse Bank was in trouble. It has also heightened fears that aggressive monetary tightening by the Federal Reserve and the European Central Bank has laid the seeds for a recession.

As an important bellwether for the economy, markets are closely monitoring the health of the financial system. The agency believes that the willingness of banks to lend next will be affected by changes in the market environment, which will lead to slower growth and employment. At the same time, competition for deposits will become more intense, and deposits from small banks may be further sucked away by large banks, creating new liquidity risks.

Now the market has rekindled fears of a hard landing for the US economy. The New York Fed's model combined with U.S. Treasury yields shows that the probability of a recession by February 2024 has exceeded 2%, the highest since the 50s. Fed funds rate futures suggest that the Fed may not raise rates in March or only raise rates by 80 basis points, with the terminal rate expected to peak in May and cut rates by 3 basis points by the end of the year.

Mark Chandler, chief market strategist at Bannockburn Global Forex, said in an interview with the first financial reporter: "I originally expected the Fed to raise interest rates by 25 basis points next week, but the thunderstorms of regional banks in the United States and Credit Suisse shook my confidence." ”

"The volatility in the overnight bond market is an initial red flag that the Fed should pause the pace of monetary tightening," Chandler said. ”

Chandler explained: "Energy prices collapsed overnight, and inflation expectations in the United States have fallen, but now the root cause of inflation is rents and services. The genie of inflation won't be back in the bottle anytime soon, but the turmoil in the financial system triggered by investor fears will force the Fed to pause temporarily. ”

With the interest rate meeting close at hand, the ECB needs to make a choice between financial stability and price stability as soon as possible. European Central Bank President Christine Lagarde said in February that no eurozone country would fall into recession in 2, but a new round of banking turmoil shows that the negative effects of the interest rate hike cycle are emerging, putting business activity in the already shaky region to the test.

As a European locomotive, Germany's economy is afraid of weak recovery. The Ifo Institute said on Wednesday that the German economy is expected to decline by 2024.0 percent this year, with a 1.0 percent contraction in the first three months, and consumer-related sectors are expected to continue to be affected by high inflation, the Ifo Institute said on Wednesday.

Commodities dive

International oil prices fell sharply on Wednesday, becoming the worst-performing commodity variety, with the biggest intraday drop of nearly 8% for the two major contracts. By the close, international oil benchmark Brent crude fell 4.9% to $73.69 a barrel, its lowest level since December 2021. WTI crude fell 12.4 percent to $2.67 a barrel. The two major contracts extended losses to more than 61% this week.

Changes in U.S. crude inventories triggered an intraday sell-off. U.S. commercial crude inventories rose by 160.4 million barrels last week, far exceeding market expectations, according to the U.S. Energy Information Administration's EIA. Total inventories now rose to 80 million barrels, 7% above the historical average.

Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with the first financial reporter that inventory changes can be seen as the latest sign of slowing economic growth, and the banking woes may further weaken the demand for crude oil. The global banking sell-off spilled over to the oil market, a sign of wavering confidence in the economic outlook.

Stephen Innes, managing director of SPI Asset Management, said in a note: "Investors are eyeing the recession vortex, which energy traders have drawn analogies to previous recessions driven by the banking sector, particularly the 2008 financial crisis, which has similar implications to the current financial turmoil and oil collapse." ”

Varga believes that the future direction of crude oil prices depends largely on the recovery of China, and he expressed optimism about this. The same is true of OPEC, whose latest monthly report expects China's oil demand to surge by 100 million b/d in the second quarter from a year earlier. Given the health of the U.S. and European economies, the outlook for OP demand for the West is not clear.

Industrial metals also suffered a sell-off, and platinum and palladium futures, which have stronger industrial properties in London copper, aluminum and lentin, and precious metals, also fell by more than 3%, and the economic haze made investors turn to the US dollar, gold, government bonds and other instruments to hedge safety.

Dr. Copper has fallen 1% since hitting a high of $9550,10/mt in January. "The impact of the Fed's rate hike on the economy and the strength of the dollar were the reasons for the previous weakening of copper prices, while the banking crisis was the main driver of the latest sell-off. Compared to other base metals, copper prices are more vulnerable to changes in the economic outlook. ”