March 20, 2023

“Financial markets started the new week on a cautious note despite the weekend’s encouraging headlines regarding the global liquidity issues. UBS Group is now Switzerland’s only global bank after bailing out Credit Suisse with state support. However, this move poses a risk as it makes the Swiss economy dependent on a single bank. Investors are worried about Credit Suisse bondholders’ potential losses and other risks, such as contagion, US regional banks’ fragility, and central banks’ ability to manage inflation and financial risks.”

Tim Hallinan – Trading Director

Main Headlines

Central banks worldwide are taking action to alleviate mounting strains in the global financial system. UBS has agreed to purchase Credit Suisse at a reduced price in an emergency deal, which may ease the banking sector’s panic. However, bank shares have continued to decline, with $17bn of risky Credit Suisse bonds being wiped out in the acquisition. The Bank of England, Bank of Canada, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank have pledged to boost liquidity in their standing US dollar swap arrangements to enhance liquidity provision through the standing US dollar liquidity swap.

UBS Group’s acquisition of its smaller counterpart, Credit Suisse, with state support makes it the only global bank in Switzerland. However, this move is a risky bet that increases the Swiss economy’s dependence on a single lender. This unprecedented decision aims to avert a meltdown in global markets, and Switzerland is pledging over 160 billion francs ($173 billion) in loans and guarantees to underpin the new group. The transaction is the first rescue of a global bank since the financial crisis of 2008, giving UBS considerable power and removing its primary competitor. It will change Switzerland’s banking landscape, where Credit Suisse and UBS branches are prevalent, often located a few meters apart.

GBP

Sterling is well bid against most major currencies overnight. The Bank of England welcomed the Swiss authorities’ actions in facilitating UBS’s takeover of Credit Suisse, indicating its support for the deal. It also stated that the British banking system was adequately funded, with the UK banking system remaining safe and sound. London is a significant financial centre, and both Swiss banks have units regulated by the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Producer prices of industrial products in Germany rose more than expected in February, but the rate of increase eased for the fifth consecutive month, indicating a potential decline in inflation in Europe’s largest economy. The Federal Statistical Office reported a 15.8% YoY increase in producer prices of industrial products, compared to analysts’ expectations of a 14.5% increase. Prices fell 0.3% from January, beating the consensus expectation of a 0.5% drop. The office attributed the increase to higher energy costs, consumer goods, intermediate goods, consumer durables, and capital goods.

USD

The dollar is weaker than most major currencies in the early morning trade. According to an unnamed official, US banks have experienced stabilised deposits, with outflows slowing down, stopping or even reversing. The official also said that Credit Suisse’s problems are unrelated to recent deposit runs on US banks. After Swiss officials announced the UBS acquisition of Credit Suisse, the official stated that US banks’ exposure to Credit Suisse is limited, as they have reduced their exposure to the second-largest Swiss lender over the past few months. The official stated that US banking regulators are in communication with Swiss authorities regarding the Credit Suisse situation.

Markets

European stock markets experienced a slight decline this morning as investors processed news of UBS’s acquisition of Credit Suisse. The pan-European Stoxx 600 index was down 0.05% at 9:52 a.m. London time, with banks trading 2% lower, and financial services falling 2.45%. However, several sectors, such as utilities, were up 1.6%, and household goods stocks rose 0.8% after shifting from losses to gains. UBS has agreed to acquire its embattled rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) on Sunday. Following the emergency rescue, the merged bank will possess $5 trillion of invested assets, according to UBS. Credit Suisse shares plummeted 60% in the morning trade, while UBS was down 9.3%.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m: Germany Feb. PPI
10:00 a.m.: Poland Feb. PPI, Sold Industrial Output
11:00 a.m.: Euro-area Jan. Trade Balance
3:00 p.m.: ECB’s Lagarde, Centeno speak

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