Investors brace for another week of volatility as mad March ends

Global financial markets are poised for another week of volatility, as traders close out a dizzying month in which worries about US and European lenders dominated sentiment and complicated central banks’ fight against inflation.

The Japanese yen and Swiss franc edged higher against the dollar as the trading week got underway in early Sydney. Traders focused on haven assets after Russian President Vladimir Putin’s comments on Saturday about stationing tactical nuclear weapons in Belarus. The euro was little changed after European Central Bank Vice President Luis de Guindos said the uncertainty in the banking sector means the central bank will take a meeting-by-meeting approach on interest rate policy.

Haven assets have seen increased demand, particularly the yen which gained the past four weeks, as fears over the health of an array of lenders and a possible US recession whipsawed markets. Volatility gripped global markets again Friday as Deutsche Bank AG became the latest lender to draw scrutiny from investors, and as US Treasury Secretary Janet Yellen convened a gathering of the Financial Stability Oversight Council.

US authorities are considering whether and how to provide support to First Republic Bank to give it more time to shore up its balance sheet, according to people with knowledge of the situation. Separately, Valley National Bancorp and First Citizens BancShares Inc. are said to be both vying for Silicon Valley Bank after its collapse earlier this month, and Switzerland’s banking regulator said Credit Suisse Group AG faces the threat of a possible probe.

Top US regulators said Friday that while some banks are under stress, the overall financial system is sound.

The banking woes have prompted bond traders to dramatically shift expectations for monetary policy. They abandoned wagers that the Federal Reserve will raise interest rates again in May and added to bets that officials’ next shift will be a rate cut as early as June. Traders also pared rate-increase expectations for the European Central Bank and the Bank of England.

“Things break when central banks tighten too much,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “But you can’t be super negative because all this stuff can change pretty quickly. There’s two-way risk right now. Conviction levels are probably a little lower.”

Murky Outlook

Meanwhile, a report this week may show a key gauge of US inflation remains stubbornly high, reminding investors of the tightrope the central bank must walk to maintain both price and financial stability.

Against that murky policy outlook, a measure of volatility of short-term Treasury notes is close to the highest since 2008. Two-year yields touched 3.55% on Friday, the lowest since September, as traders dumped rate-hike bets. The rate has plunged more than 100 basis points since eclipsing 5% in early March for the first time since 2007.

The yen has surged about 4% this month, more than any other major currency, amid the volatility and as plummeting bond yields reduced other economies’ interest-rate advantage over Japan. Commodity-linked currencies, including the Australian and New Zealand dollars, have underperformed.

Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments, said he anticipated a bond rally as the Fed’s tightening slows the economy, but the volatility and speed of the move underscores the fragility of markets.

“We were positioned for this to happen over the next nine months, but it happened in nine days,” he said. “I’m not going to complain, but I’m worried how quickly it’s taken place.”