Markets are eerily calm after the banking chaos - but tightening credit and tumbling earnings could reignite volatility, UBS says
options contracts and is widely seen as Wall Street's"fear gauge" – fell to its lowest level since January 2022 on Monday, as markets enjoyed a period of relative tranquility despite Silicon Valley Bank's collapse sparking fears of wider turmoil.
That's because investors are increasingly confident the Federal Reserve will respond to the chaos by ending its interest-rate hiking campaign soon. Rising rates erode the appeal of stocks because they boost returns from other assets such as bonds and cash, and raise companies' debt payments. They also increase the cost of mortgages, car loans, credit cards, and other forms of borrowing, curbing demand from consumers and businesses and weighing on corporate sales and profits.
Over 70% of traders expect the central bank to stop raising interest rates at or before its June meeting, according toBut the relative consensus could soon be shattered by a credit crunch, UBS said. In the aftermath of SVB's collapse, analysts are worried that other lenders will be wary of further bank runs and deposit outflows, and therefore offer out fewer loans. They have warned tighter credit could fuel a decline in spending and investment levels that would weigh on stock-market valuations.
"While market expectations for the terminal fed funds rate have dropped by 70 basis points since SVB's collapse, it is hard to believe that a banking crisis and tighter credit conditions have narrowed the range of possible outcomes, especially to the downside," Haefele wrote.Read more:
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