• Weekend banking deal supports sentiment
• Stock markets edge higher
• Gold loses some of its safe-haven appeal

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A sense of calm has returned to global markets after a double-barreled dose of good news on the US economy and financial sector.

Renewed concerns around the durability of the banking system plagued trading on Friday, with bank shares in Europe getting battered as fears of contagion spread.

Yet, the mood improved once the latest US business surveys rolled out.

These surveys painted a brighter picture of economic conditions, praising the resilience of demand in the services sector and highlighting a reacceleration in inflationary pressures.

Similarly, business leaders did not appear particularly concerned about the impact of the banking episode on their operations.

Miraculous Comeback

This was the catalyst for a miraculous comeback in stock markets, with the S&P 500 erasing some heavy losses to close higher by 0.5% in the end.

Futures point to further gains when Wall Street opens on Monday, likely reflecting some relief that no other banks collapsed this weekend.

Beyond the absence of escalation, the news flow around banks has started to improve too.

Investors were greeted on Monday with headlines that First Citizens Bank will absorb the deposits and loans of failed Silicon Valley Bank, signalling that regulators are working round the clock to prevent any further spillovers.

Rate Cuts Back on the Menu

Knowing the events of this tumultuous month in advance, it would be difficult to guess that the Nasdaq 100 would be trading 6% higher, exhibiting teflon-like qualities.

After all, gloomy economic news is ultimately negative for corporate earnings, and by extension for equity markets themselves.

Instead, it was a classic case of ‘bad news is good news for stocks’ because the Fed will ride to the rescue.

The turmoil in banking has convinced investors that interest rates have likely reached their peak already, and that rate cuts will be back on the menu by summer.

That’s a powerful elixir for riskier assets, hence why tech shares have been flying high.

The problem is that valuations, especially in tech, have started to reach exorbitant levels again.

Speculation for rate cuts and increased liquidity into the financial system are fantastic news for equities, but at some point, it’s just difficult to justify these valuations heading into what will likely be an earnings recession starting this quarter. The risk/reward seems poor.

Gold: Peak Risk Passes, Poses Downside Risks

Gold has turned into a barometer for financial stress this month, reflecting the degree of concern around the banking debacle, mostly because of its sensitivity to interest rate expectations.

With widespread fears that the banking sector has reached a breaking point, there’s been a dramatic decline in US yields that has turbocharged the non-yielding precious metal.

Whether this rally is sustainable though, will ultimately depend on how the financial system fares and whether the Fed rate cuts that have been priced in for this year truly come to fruition.

As things stand, 'peak stress' seems to have passed, so there’s a risk of a retracement after this fierce rally in gold.

Marios Hadjikyriacos is Senior Investment Analyst at XM.com. An original of this article can be viewed here.