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Falling Dominos
Aurelie Barthere
Key Takeaways
5 min read
  • The Fed has indicated that it would hold rates steady, and the resolution of the central bank will be tested this year, as growth deteriorates.
  • Our main scenario remains that the Fed and other central banks will likely hold rates high (and keep hiking in the case of the ECB) as growth weakens, leading to a hard landing and the revisit of crypto’s 2022 lows before a full bottoming.
  • The counter-scenario (lower probability in our view) is that the Fed will blink, rescue the next “falling domino” (in banking or outside), and pivot early, even with core inflation at 3-4%. This scenario has some merit and would be bullish crypto.

Impact of the banking turmoil

Following a Bloomberg article that revealed that PacWest, another US regional bank, was considering a sale, the S&P Regional Bank Index lost another 9% last week, with PacWest down by 31%.

Is this the continuation of a series of falling dominos? What will be the effects on macro and markets?

Looking at the hard data, there is a limited impact so far on aggregated weekly lending growth (see below). Manufacturing and services surveys also indicate that the US economy is holding up vs other countries, especially in the manufacturing sector.

Looking at market indicators, we see contained stress so far outside banking stocks, which is surprising given the other negative newsflow...