Are the Markets Ready to Turn Bullish?

Market sentiment in the United States and Europe is quite fragile; traders fear that the collapse of Credit Suisse, Silicon Valley Bank, and liquidity issues in other smaller banks could lead to a meltdown. But others feel that stocks are poised to enter a bullish phase, and they have one key reason to believe this, a reason that had previously propelled equities to an all-time high.

In terms of monetary policy, central banks often walk in lockstep, and when one large central bank such as the Fed takes a dovish approach, other central banks of significance are likely to follow suit. Tomorrow, Fed Chairman Jerome Powell will be in the limelight when the U.S. Federal Reserve announces its monetary policy. There are a few traders who think that the Fed is likely to modify its monetary policy navigation plan, and that we may hear from the Chairman that such a pivot could come, with the Fed potentially suspending aggressive interest rate rises in order to stabilize the banking crisis, as inflation stability may take a back seat for the time being—the precise rationale that prompted the Fed to boost interest rates at a record pace in the first place.

Traders also thought that the European Central Bank's President Christine Lagarde would pivot when she delivered the bank's interest rate decision a few weeks back, amid upheaval in the European financial sector. Instead, she startled the markets by raising interest rates by 50 basis points as per their initial plan. In her remarks, the President made it plain that she is unwilling to play the trade-off card between inflation stabilization and financial stability. Lagarde was sure that the bank has the capacity to address these concerns and deliver a solution to the market.

However, investors and traders are not as confident, given that the present financial crisis is a significantly greater concern for them. Both the Fed and the ECB have no other relevant instrument to deploy except slowing their aggressive interest rate raise process.

Going into tomorrow's Fed meeting, investors have essentially priced in a 25 basis point interest rate rise from the Fed this week, which is much lower than when Jerome Powell spoke before Congress a few weeks ago. After that speech, it was widely assumed that the Fed would raise interest rates by 50 basis points. But a surprise hawkish move tomorrow could send stocks lower. 

The wager that investors have on the U.S. and European stock markets becoming positive is based on the expectation that a loose monetary policy will return, pricing in a rate pause after the Fed's 25 basis point interest rate boost this month. The ECB, in such a scenario, would likely use a similar tactic to mitigate the impact of rising interest rates. It is imperative that investors should pay close attention to the degree to which legislators may expand their support for depositors. Janet Yellen, the U.S. Treasury Secretary, said today that if the crisis continues, the U.S. would act again to safeguard depositors.

I believe that irrespective of how much the U.S. Treasury intervenes or central banks in the EU increase their assistance to put a lid on the financial turbulence, if the Fed and the ECB do not halt and make the essential trade-off, any positive surge is likely to fade.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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