It’s been a bad week to be a banker as contagion from California’s Silicon Valley Bank’s failure last week crossed the pond to the Swiss cantons and European banks.
Last night the venerable Credit Suisse – although based in Zurich, considered a global systemically important bank by the Financial Stability Board and a primary Forex dealer for the Fed – was burning the midnight oil with the Swiss National Bank and agreed to a USD54bn rescue package.
The Central Bank’s support helped stabilize Credit Suisse which had seen its shares pummelled by traders who had misgivings over its accounting practices. The bank – deemed too big to fail – was the first titan that has been forced to take assistance.
Credit Suisse, founded in 1856, was one of the least affected major banks during the global financial crisis, but afterwards began shrinking its investment business, executing layoffs and cutting costs.
As reported, other European banks are now starting to come into the firing line.
- Trump vs the Fed: can Powell complete his term under new management?
- Anthony Scaramucci: This is how markets will react to the presidential election result
- What’s driving the Wall Street bull market, and will it last?
TickMill Market Analyst, Patrick Munnelly helps summarise what’s happened subsequently…
After the fallout in the US from the failure of SBV & Signature Bank, yesterday saw the European leg of the crisis develop as the chairman of The Saudi Bank was adamant that there wouldn’t be any further investment from them for Credit Suisse.
This led to Credit Suisse’s shares unravelling through the European and US trading sessions, losing as much as 24%. However, the Swiss National Bank stepped in overnight, stating that they would provide whatever liquidity was required to support the bank.
Caution Counselled
Asian equity markets pared losses and European futures are trading on the front foot into the open. But caution is counselled, as this was the same scenario we saw as the market opened on Monday. What followed was a heavy sell-off as the bailout news was digested.
Investors remain on tenterhooks as market volatility reverberates around global markets, this leaves the European Central Bank (ECB) in a precarious position heading into its policy decision today at 1:15GMT followed by the press conference by ECB Chief Christine Lagarde.
Until this week markets had been pricing a rate rise of 50 basis points (bps), which would increase the deposit rate to 3%. This move had been widely advertised by ECB members given the ongoing angst regarding inflationary pressures, which is expected to be confirmed in updated forecasts given today.
Given recent market volatility and the potential impact it may have for the economy, markets have started to lean toward a 25bps move with some investment banks favouring the possibility of no move today. Current pricing allocates a 20% probability to a 50bps move.
President Lagarde’s press conference will be parsed for her views regarding the impact of the current market volatility on economic projections and how this may weigh on the rate path going forward.
Pause for thought
Stateside, the US data docket provides updates for weekly jobless claims, import prices, housing, and the Philadelphia Fed manufacturing survey.
As with the ECB the Fed also faces a conundrum heading into their rate setting meeting next week. In his testimony on Capitol Hill last week, by U.S. Federal Reserve Chairman, Jerome Powell had indicated that the hiking pace for interest rates may be increased towards 50bps given the recent robust round of economic data.
However, that was last week, and this is this week – a lot has changed – and Powell made those comments prior to the recent concerns regarding the banking systems stability.
This week’s US CPI data’s inflation stubbornness would likely have made the 50bps a lock, however, the market turbulence since late last week, has muddied the waters for next week’s policy update with rates markets leaning towards a 25bps move at best, with many market watchers favouring no move at all.