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Financial sector stumbles, investors eye Dimon and El-Erian comments

Two investment legends shared their opinions on the current market situation.

The US financial sector (XLF ETF) has failed to maintain any bullish rally, despite many bailouts and fresh capital. As a result, the XLF ETF has not followed the broad market rally and has underperformed vastly.

Dimon with comments on the current crisis

Jamie Dimon, CEO of JPMorgan Chase (JPM), stated in his annual letter to shareholders that it is unlikely that stricter regulations would have prevented the sudden deposit outflow that led to Silicon Valley Bank’s demise. Dimon urged caution as federal officials consider how oversight of the sector should change in the wake of the nation’s second-largest bank failure.

“It is of the utmost importance that we avoid knee-jerk, whack-a-mole, or politically motivated answers, which frequently have the opposite effect of what was intended,” he stated.

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This present crisis, according to Dimon, “is not yet finished” and “will have implications for years to come.” He said, however, that it is not comparable to 2008 when mortgages held by banking institutions worldwide went horribly wrong. This new banking crisis involves significantly fewer financial actors and concerns to be handled.

Dimon contributed to the turmoil of the last month by helping to orchestrate a cooperative attempt by eleven banks to rescue the troubled San Francisco lender First Republic (FRC) with $30 billion in uninsured deposits. First Republic, the nation’s fourteenth-largest bank as of December 31, with $212 billion in assets, saw a significant decline in its stock price, prompting the capital injection.

El-Erian criticizes Fed

According to renowned economist Mohamed El-Erian, the Federal Reserve’s year-long vigorous monetary tightening actions may be one of the most catastrophic policy failures of the previous few decades. El-Erian has been extremely critical of the Federal Reserve in the past year.

Monday, he published an opinion piece on MarketWatch. He said the central bank “has regressed in its analysis, projections, decisions, and communication” and has committed “one mistake after another.”

“The Fed’s problems should worry everyone. A loss of credibility directly affects its ability to maintain financial stability and guide markets in a manner consistent with its dual mandate of maintaining price stability and supporting maximum employment,” he wrote.

According to El-Erian, Jerome Powell will be remembered alongside Paul Volcker and Arthur Burns. In the 1980s, the former had conquered soaring inflation. But unfortunately, the latter maintained an excessively lax monetary policy for too long, resulting in stagflation (a blend of slow economic growth and rampant inflation).

One last rate hike?

During its March policy meeting, the Federal Open Market Committee (FOMC) agreed to increase the benchmark fed funds rate by 25 basis points to a target range of 4.75% to 5%.

The latest Survey of Economic Projections (SEP) maintained the median rate for 2023 at 5.1%, indicating that monetary officials anticipate another rate increase this year.

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Powell told reporters he does not anticipate any rate reductions this year and added that the rate-setting committee might even raise rates if necessary.

The first major resistance for the XLF ETF is at December lows near $33.30, followed by the 200-day moving average at $33.75 (the blue line). On the downside, the support is expected at around $31.

XLF daily chart

XLF daily chart, source: author´s analysis, tradingview.com

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