Monday Morning Coffee - Markets Update - 20 Mar 2023 - UBS pushed in the deal with Credit Suisse, billions of $ in bonds erased
Market Update: Fears of banking sector problems to continue
Mon, 20 Mar 2023 08:51 CET
Today's important market events:
UBS has acquired Credit Suisse for CHF 3 billion, with Credit Suisse's additional tier 1 capital of approximately CHF 16 billion being written off. There has also been coordinated action by several central banks to enhance the provision of liquidity via the standing US dollar liquidity swap lines with daily 7-day maturity operations.
APAC stocks have been under pressure due to ongoing concerns surrounding the banking sector, with Hong Kong underperforming. Meanwhile, US equity futures have been indecisive. The DXY has been trading rangebound as the market digests UBS's emergency takeover, with the EUR/USD eking out minimal gains. The USD/JPY has eventually benefited from its haven appeal.
In terms of futures, 10yr UST futures have seen two-way price action, Bund futures have eased from last week's peak, and 10yr JGB futures were firmer following last Friday's after-hours advances.
UBS has stated that it did not initiate the discussions but believes the transaction is financially attractive to UBS shareholders. As part of the deal, UBS will de-risk and downsize Credit Suisse’s investment banking operations. Colm Kelleher will be Chairman and Ralph Hamers will be Group CEO of the combined entity. Credit Suisse shareholders will receive 1 share in UBS for 22.48 shares in Credit Suisse, and FINMA has determined that Credit Suisse’s additional tier 1 capital will be written off. Both banks have unrestricted access to the SNB’s existing facilities. The ECB and BoE have welcomed the merger and noted the resilience of their respective banking systems. However, some European banks are reportedly examining scenarios of contagion potentially spreading across Europe’s banking sector and looking to the Fed and ECB to step in with stronger signals of support.
The ASX 200 in Australia has continued its decline below 7,000, with weakness in sectors such as energy, real estate, consumer, and finance. However, gold miners have seen a boost after a recent climb in the price of gold.
The Nikkei 225 in Japan has been under pressure due to issues in the banking sector, and the Bank of Japan's Summary of Opinions did not provide any new information, reiterating the need for maintaining monetary easing.
The Hang Seng in Hong Kong has underperformed due to weakness across various sectors, while the Shanghai Composite in mainland China has been kept afloat after a surprise cut in the reserve requirement ratio by the People's Bank of China to boost liquidity and support the economy, although the benchmark lending rates have been maintained.
US equity futures are uncertain, and early momentum from the UBS-Credit Suisse deal is gradually fading. European equity futures suggest a softer opening for the Euro Stoxx 50 after a 1.3% decline in the cash market on Friday.
The DXY, which tracks the value of the US dollar against a basket of major currencies, traded rangebound as markets digested UBS's emergency takeover of Credit Suisse and were tentative ahead of this week's FOMC meeting. The Fed also announced enhanced USD liquidity swap lines with major central banks to supply dollars on a daily basis.
The EUR/USD pair saw minimal gains amid an uneventful greenback, while ECB officials Holzmann and Rehn made comments over the weekend about the ECB rate and price and financial stability.
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The GBP/USD pair remained little changed after facing resistance at 1.2200, while the USD/JPY pair was lacklustre as the Japanese yen eventually benefited from its haven appeal. Antipodeans traded indecisively with late headwinds as risk appetite gradually worsened.
In fixed income markets, 10-year UST futures saw two-way price action, initially pressured by the UBS-Credit Suisse takeover deal but then bouncing off lows amid a flight to quality. Bund futures eased from last week's peak, and 10-year JGB futures were firmer following after-hours advances and the BoJ's market operations.
In commodities markets, crude futures were choppy and failed to sustain early gains due to lingering banking sector jitters over risk sentiment. Iraq's Oil Minister said his country is committed to OPEC's agreed production rates and obliged some oil companies' operations in the south to cut production to come in line with OPEC's agreed rates, while Iraq and OPEC stressed the importance of coordinating to stabilize prices.
Iran set April Iranian light crude oil price to Asia at Oman/Dubai plus USD 2.50/bbl. India plans to extend export restrictions on diesel and gasoline beyond March 31st.
TotalEnergies reported that 34% of operational staff at its refineries and depots conducted a strike on Sunday morning in protest against the French government's move to raise the retirement age by two years.
Spot gold pared some of last week's advances after stalling on approach towards the USD 2,000/oz level, while copper futures were flat as risk assets failed to sustain the initial momentum from the UBS-Credit Suisse merger deal.
A study by consultants Oxera, cited by FT, warns that the Bank of England's plans to revamp bank capital rules could lead to a 25% reduction in lending to small businesses, which could threaten jobs and economic growth.
ECB's Holzmann expresses concern about the possibility of ECB rates rising above 4%, and expects a few more rate hikes, but says that the extent of further hikes would depend on data, and he does not foresee a global financial crisis like that of 2008.
ECB's Rehn states that the ECB will take action to ensure price and financial stability, and notes that inflation is not easing enough.
Moody's affirms Greece at Ba3, with an outlook revised to positive from stable, and affirms Luxembourg at AAA with a stable outlook. S&P affirms Belgium at AA with a stable outlook.
Looking ahead, there will be a meeting between Russian President Putin and Chinese President Xi, as well as supply from the Eurozone.