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STOXX 600 up 0.4%
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Credit Suisse receives SNB lifeline, shares jump 25%
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Financials lead gainers
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Eyes on ECB
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BANK SECTOR SEES "DASHED HOPES" BUT SOLVENCY FEARS OVERDONE - UBS (1037 GMT) Blink and you'll miss it. That's how it has felt since late last week when reports of what turned out to be SVB's imminent demise began rolling in, and after a dramatic night yesterday for Credit Suisse. Screens are flashing green this morning, as markets take a breather. But with under three hours until the ECB announces its policy decision, it's hard to see the wood from the trees.
For Mark Haefele, chief investment officer at UBS Global Wealth Management, and his team, there are three main issues markets are grappling with right now, all "interrelated but different". Namely they are bank solvency, bank liquidity and bank profitability. Writing in a daily note, the UBS strategists say solvency fears are "overdone".
"Depositors in the vast majority of institutions remain well protected", they say, given banks retain strong liquidity positions. "However, a small number of individual banks may require central bank liquidity support if funding conditions remain challenging for an extended period, and profitability headwinds for the sector are mounting."
On the issue of bank solvency - the main factor behind SVB's woes - the UBS strategists do not think this vulnerability extends to "global systematically important banks" (G-SIBs). They cite tougher regulations since 2008 that have required banks to keep ample surplus of assets over liabilities, even in stressed economic circumstances. "It is also worth remembering that at G-SIBs, securities designated as “available for sale” are regularly marked-to-market against regulatory capital requirements." The second issue is bank liquidity, which they say can become an issue if a bank is unable to inspire confidence to retain deposits, or attract wholesale lenders over a sustained period.
"While this does not necessarily affect a bank's ability to pay creditors eventually (i.e., its solvency), it may require a “lender of last resort” to step in to resolve mismatches between the duration of assets and liabilities," Haefele and his team write in a note.
The third and final issue is bank profitability - "the degree to which a bank’s revenue can sustainably outstrip its costs".
Until recently, higher interest rates had contributed to a rally in European bank stocks, given they were expected to boost profitability through higher net interest margins.
The index of banks had risen by around 17% from the beginning of January until March 7th, partly on such bullish sentiment around interest rates.
"In this context, the sell-off can also be viewed through the lens of 'dashed hopes'", write the UBS team.
But they do acknowledge that headwinds to profitability are mounting.
"Some banks will be forced to further increase deposit rates to reduce the risk of deposit
outflows, and wholesale lenders may also demand higher rates of return, increasing funding
costs."
Banks may opt to refrain from issuing new loans, they write, in order to boost liquidity,
and a weaker economic outlook may require banks to take more provisions against future loan
losses.
When it comes to how to invest, UBS are neutral on European financials. High-quality fixed
income is attractive in the current environment, they say, and on the stocks side, the U.S. is
their least preferred and they prefer EM stocks. They see the dollar as overvalued.
(Lucy Raitano)
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STOXX 600 CHEERS CREDIT SUISSE SUPPORT (0912 GMT) Credit Suisse's $54 billion lifeline has given the broader market a boost on Thursday, but markets are still jittery ahead of the European Central Bank's policy decision later in the day. Shares in the bank are up 19% after it said it would borrow funds from the Swiss National Bank to shore up liquidity and investor confidence.
Shares plunged as much as 30% during Wednesday and closed at a record low, after its largest investor said it could not provide more financial assistance because of regulatory constraints. The liquidity support has provided some relief, and given a boost to market sentiment.
The pan-European STOXX 600 is up 0.3%, recovering some of the lost ground from Wednesday's 2.9% drop.
Germany's DAX , France's CAC 40 and Britain's FTSE 100 are all up around 0.6%.
"It does look for the time being that risk markets have stabilised," says Deutsche Bank's Jim Reid in an email. The STOXX 600 banking index is up 1.4%, as other banks from the region retraced some of the previous day's losses. Commerzbank, AIB, Banco Santander and UniCredit are some of the index's biggest gainers, all jumping by over 3%.
Eyes are now turning to the ECB and its President Christine Lagarde, who will provide the first insight into how the central bank perceives the current banking crisis and how it will impact their fight against inflation.
Markets are currently pricing in a 25 basis point hike, with around a 50% chance of a larger 50 bp rate rise. Last week, markets had priced in with near certainty a 50 bp rate hike.
(Samuel Indyk)
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EUROPEAN FUTURES SURGE ON CREDIT SUISSE LIFELINE (0741 GMT) European equity futures jumped on Thursday after Credit Suisse said it would borrow up to $54 billion from the country's central bank, allaying immediate fears of a full-blown banking crisis.
Shares in the embattled bank tumbled 24% on Wednesday but are indicated to open higher by around 26% today, providing some comfort to jittery markets.
"Providing a liquidity lifeline is a positive step and should help to calm market sentiment in the short term," says Mohit Kumar, interest rate strategist at Jefferies.
Euro STOXX 50 futures are taking the news positively, up 1.5%, while futures on the DAX , CAC 40 and FTSE 100 are higher by 0.8%-1.3%. The European Central Bank's policy meeting is now set to take centre stage, with rate hike plans clouded by the turmoil in the financial system.
Money markets are fully pricing in a 25 basis point hike with investors seeing around a 50% chance of a larger 50 bp move. Last week, markets had priced in with near certainty a 50 bp rate rise but at one point on Wednesday saw only a 20% chance.
"The prudent course of action would be to pause and resume hikes later, but the ECB might judge that its already battered inflation-fighting credibility cannot afford it," ING rates strategists say in a note. Meanwhile, Wall Street futures are a touch higher and MSCI's broadest index of Asia-Pacific shares ex-Japan is down around 1%.
(Samuel Indyk)
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ECB INTO THE EYE OF BANKING STORM (0704 GMT)
The European Central Bank (ECB) meets today for the first big test of policymakers' response to bank stability fears that are sweeping the globe. In Asia the brakes came on a rout in bank shares after Credit Suisse's late-night announcement of plans to borrow as much as 50 billion francs ($54 billion) from the Swiss National Bank. The lender called this "decisive action to pre-emptively strengthen its liquidity". It's not entirely clear if that's reassuring or even more worrisome, but traders have initially gone with the former.
European futures rose 2%. FTSE futures rose 1.2%. Bank stocks in Hong Kong , Sydney and Tokyo opened down but crept from lows during the day. Credit Suisse boss Ulrich Koerner said his bank's liquidity basis is "very, very strong". But three recent U.S. bank failures highlight the brutal speed with which confidence, and deposits, can evaporate. The ECB's response to this febrile atmosphere in financial markets - while inflation is still running hot - will be telling on policymakers' approach to the mounting stress.
It will be a tricky balance. A big interest rate hike, even if justified by economic conditions, can unleash fear that more banks - or something else - is going to break. A hold-steady or even a cut will feed fears that something very big is very wrong. Either way, the outcome will test markets' dramatic repricing of the worldwide interest rate outlook in recent days. Traders see a 25 basis point hike as the most likely outcome, a dramatic come-down from near certainty on a 50 bp hike only a day earlier.
Key developments that could influence markets on Thursday:
- Customers and markets' response to Credit Suisse's plans - ECB policy meeting: Decision 1515 GMT; news conference ($1 = 0.9314 Swiss francs)
(Tom Westbrook)
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