Risk is still on

Markets

After the 'risk-on' sentiment tilt built across the globe, major benchmarks remain well supported as we enter the month-end rebalancing window as the tilt of the tape amid extraordinary price action remains bid. And in a tactical context, if price action determines sentiment and narrative, investors are certainly in a much better place today than last Friday.

And with most players now convinced this mini-banking crisis is not 2008 all over again. Hence the Fed bail-out data has had a minimal impact on risk so far.

For the record:

*FED DISCOUNT-WINDOW LOANS FALL TO $88.2B FROM $110.2B

*FED BANK TERM FUNDING LOANS RISE TO $64.4B FROM $53.7B

Investors continued to flock to indexes and selective single stocks. The S&P 500 is now up almost 2% this week as the market's primary fear gauge, the VIX, sinks below 20 - all in the wake of receding tensions for Regional Banks.

Keeping in mind that anytime the VIX does move below 20, it typically initiates buy orders for systemic types, and with the sell side well aware of this tendency, offers at the index level and on single stocks in play tend to pull back; hence market moves into supply and demand tango but generally to the disadvantage of the buyers.

The resilience of US equity markets also highlights how concentrated the S&P 500 index is with Mega Cap Technology-driven companies -- business models that are not particularly sensitive to a mild shift in economic growth expectations. 

So while the ramifications of tighter lending standards are yet to be felt across the broader economy, some investors may be comfortable that even when they are felt, the bulk of market-moving S&P 500 companies will be less impacted as the creme of the crop tends to deliver a lot of free cash flow. 

Taking a step back, however, the S&P 500 index has filled the gap to where banking stresses emerged in early March -- up 5%+ year to date. And from a valuation perspective, this may create a hurdle for continued outperformance. From a money manager's perspective, the S&P 500 P/E of 18x may start to screen expensive versus the alternatives despite the recent decline in Treasury yields.

Forex 

A rise in jobless claims and lower US Q4 GDP growth also boosted expectations of a Fed pause and sent the EURUSD flying above 1.0900 as traders will hit the dollar on signs of US economic weakness ahead of the anticipated Fed policy remix( tight credit offsetting the need for rate hikes. But the primary catalyst today behind buying the Euro is the expected dovish Fed pivot before the ECB. And last night, the US economic data merely supports that cause.

While markets sift through the wreckage of US banking stresses, Asian currencies should continue to perform well, especially with US rates markets signalling a Fed cut later this year. 

Asia FX remains anchored by Chinese growth and has provided an oasis during all the recent western bank turmoil. Solid growth in China should continue to provide a fillip to Asia's export-oriented economies. But if you need " carry, " regionals would be less well placed in a pure carry trading environment, given lower yield levels in this region.

With the market losing confidence in the US dollar, we now think USDCNY will move towards 6.78 in Q2, which should also anchor Asia FX.  

Commodities 

Metals are feeding off the weaker US dollar as precious and industrial revel in the prospect of a Fed pause.

Despite a broader market in risk-on mode, Brent continues to run into a wall of offers ahead of $79bbl, perhaps owing to the fragile nature of momentum traders being counter-trend long contracts due to a perceived short-term supply disruption. 

And while Oil prices could remain supported by future Fed rate cuts and the weaker US dollar, history shows that oil prices have predominantly followed US economic indicators, so the rise in jobless claims and a downgrade in Q4 US GDP supports today's price action given that prompt oil prices live in the present, not in the present future.