CNBC Daily Open: Markets are pricing in the best of both worlds

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Investor fears are fading. Is it premature?

• In a bank bailout in the European Union The EU will start “absorbing the equity stack, and then the AT1 and then Tier 2 and then the rest,” Dominique Laboureix, chair of the EU’s Single Resolution Board, said in an exclusive interview with CNBC.

Fears are fading and markets are recovering. But it would be too early to celebrate – at least not until we know how the economy is faring from forthcoming reports.

Yesterday all major indices rose. The S&P 500 was up 0.57%, the Dow Jones Industrial Average was up 0.43% and the Nasdaq Composite was up 0.73%. Investors continued to flock to tech stocks, with Amazon up 1.75%, Microsoft up 1.26% and Netflix up 1.93%. “The Silicon Valley bank fiasco was just the oxygen the tech bull needed to get out of his fear and get back to work.” said CNBC’s Jim Cramer.

How do we know investors are regaining confidence other than basing their sentiment on market movements? We look at the CBOE Volatility Index. The Volatility Index is derived from the price of S&P 500 options and measures market expectations of how the S&P will move over the next 30 days. Hence, it serves as a proxy for investors’ fears. It is currently around the level last seen in early March before the collapse of the SVB.

In other words, markets appear to be pricing in the best of both worlds: “a recession that allows for low interest rates and sharply lowering inflation, but does not have a massive negative impact on corporate earnings,” Ajay Rajadhyaksha, global research director at Barclays, wrote in one Thursday message.

That might be premature as Rajadhyaksha suggests. Yesterday’s jobless claims figure, although reported up, is still below what the Federal Reserve would like to see for a significant slowdown in the job market. We have more detailed data on the economy with the release of the Personal Consumption Expenditure Index later today and the March jobs report next week.

For now, though, it’s undeniably nice to have a break from the banking crisis.

— CNBC’s Dan Mangan contributed to this report.

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