Stocks decline, bonds rally as banking stress deepens

BLOOMBERG

European stocks decline and US equity futures retreated as the emergency weekend sale of Credit Suisse Group AG to UBS Group AG failed to soothe market jitters over the health of the banking system. Investors turned to the safest assets, spurring gains in Treasuries, while gold rose on haven demand.
The Stoxx Europe 600 index dropped 0.7%, with a sub-index of banking stocks wiping out its remaining gains for the year. UBS shares fell as much as 16%, while Credit Suisse sank 60%. Contracts on the S&P 500 edged lower, with major lenders JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co and Citigroup Inc all down in US premarket trading. Nasdaq 100 futures steadied. A gauge of Asian shares fell by more than 1%.
Policymakers are rushing to shore up confidence after the problems at Credit Suisse (CS) and the collapse of Silicon Valley Bank (SVB) added to broader concerns over financial stability. The Federal Reserve and five other central banks announced coordinated action to boost liquidity in US dollar swap arrangements to ease strains in the global financial system. Traders are also assessing what impact recent events will have on the path of Fed policy tightening in the run-up to its next rates decision due on Wednesday.
“Markets are anxious about which bank is next to fall under trouble, as the whole system is based on confidence and events can escalate quickly, as we have seen with recent cases,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “There will be many questions and doubts on how UBS will integrate Credit Suisse given the size of the combined business.”
The anxious start to trading week prompted a flight to safety, with German and UK government bonds rallying. The policy-sensitive two-year Treasury yield fell 11 basis points, while 10-year yields dropped to lowest since September. Gold rose above $2,000 an ounce for the first time in more than a year.
Among the biggest losers in the Credit Suisse sale are investors in the bank’s riskiest bonds, known as AT1s, worth $17 billion. These money managers are set to be wiped out as the bonds become worthless due to the use of public funds for the rescue. The Swiss National Bank is offering liquidity assistance to UBS while the government is granting a guarantee for potential losses from assets UBS is taking over.
“The AT1 wipe out of CS is a wake-up call for investors of that segment and will prompt a significant re-evaluation of those bonds,” RBC Brewin’s Mui said. “That could lead to higher funding costs for European banks going forward.”
A measure of dollar strength swung between small gains and losses. The Swiss franc and the euro fluctuated, while yen rises. Oil sank, with US benchmark West Texas Intermediate plunging below $65 a barrel to hit the lowest level since late 2021.
Meanwhile, Morgan Stanley strategist Michael Wilson said the stress in the banking system marks what’s likely to be a painful and “vicious” start of an end to the bear market in US stocks. The S&P 500 will remain unattractive until equity risk premium climbs to as high as 400 basis points from the current 230 level, according to Wilson, who is known for being one of Wall Street’s staunchest bears.
Much of the debate in markets is now focussed on whether the Fed will deliver another quarter-point hike or pause at its March 21-22 meeting, amid the heightened financial instability and a softer-than forecast reading on inflation expectations. Traders no longer see much chance of a bigger half-point hike that Chair Jerome Powell had put on the table just before concerns about financial stability emerged.