As U.S. authorities struggle with workouts of two failed regional banks and resulting depositor runs that have undermined others, European markets are trying to assess the implications of a forced marriage in Swiss banking on Sunday.
In emergency weekend meetings, Swiss authorities orchestrated a deal for UBS to buy ailing rival bank Credit Suisse for $3.2 billion - at a fraction of Friday's battered CS share price - to prevent a failure of the systemically important Credit Suisse sending shockwaves through world banking. The details of the buyout did little to ease market tensions first thing on Monday, with the UBS share price falling 12% in early trade and euro zone bank stock indices down another 3%.
Of particular concern was the impact on wider bank funding markets of a controversial decision to wipe out Credit Suisse's junior bondholders even as equity investors gained something from the UBS deal. European bank chiefs were immediately on guard for further contagion and insisted more support was required. Acknowledging the risk of wider stress shortly after the Swiss deal, the U.S. Federal Reserve, European Central Bank and other major central banks issued statements to reassure markets and announced coordinated action to provide U.S. dollar liquidity where needed and backstop their banking systems. But in displaying that level of concern, the authorities merely underlined the potential of the shock and its implications for lending, growth and inflation.
"There's going to be less credit. Less credit means less growth. So, some of the mission of the Fed in trying to slow the economy will be done here," former Goldman Sachs chief executive Lloyd Blankfein said on Sunday.
And that thinking has crushed the interest rate horizon
everywhere.
Futures markets now see the first Fed rate cut emerging by
midyear. No further ECB rate rises are fully priced after it
pushed ahead with a hefty half-point rate rise in the thick of
the crisis last week and there's less than a 50% chance of a
further Bank of England rate rise when it meets this week.
U.S. Treasury yields plunged across the curve, with 2-year
yields hitting 6-month lows of 3.6% and 10-year yields also
hitting 6-month lows at 3.29%.
The steepening of the 2-10-year curve to show an inversion
of just 40 bps was cold comfort as investors pointed out that
the long-inverted curve - frequently a harbinger of recession
and stress - often steepens just before the actual recession
hits.
U.S. stock futures were down about 0.5% ahead of the open
but the VIX volatility gauge jumped three points to near 29.
A U.S. official said on Sunday that the deposit outflows
that left many regional banks reeling in the wake of Silicon
Valley Bank's failure had slowed and in some cases reversed -
but European banking worries and credit rating downgrades for
some of the banks kept markets on edge.
The U.S. Federal Deposit Insurance Corp is planning to
relaunch the sale of Silicon Valley Bank after failing
to attract buyers in its latest auction, possibly seeking a
potential break-up of the collapsed lender. One of the options
under consideration by the regulator is a sale of SVB's private
banking arm, which caters for wealthy clients.
Even though Fed discount window lending and liquidity
provision was seen by some as a resumption of some form of
quantitative easing, banks such as Morgan Stanley cautioned
against reading it that way - stressing that Fed asset purchases
were hugely different to emergency loans.
"It won’t stop the already tight lending standards across
the banking industry from getting even tighter. It also won’t
prevent the cost of deposits from rising, thereby pressuring net
interest margins," Morgan Stanley said on Sunday. "In short, the
risk of a credit crunch has increased materially."
Key developments that may provide direction to U.S. markets
later on Monday:
* Meetings and statements on banking worries.
* European Central Bank President Christine Lagarde speaks at
the European Parliament in Brussels
* Chinese President Xi Jinping meets Russian President Vladimir
Putin in Moscow.
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US rate horizon sinks Credit Suisse rescue National exposure to banks UMich inflation expectations ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(By Mike Dolan, editing by Nick Macfie
mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)
