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Credit Suisse deal effects set to ripple through Europe

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Having come off the worst week for European equity markets this year, volatility looks set to continue this week now that the fate of Credit Suisse appears to have finally been sealed, in a $3.2bn agreement that sees its rival UBS take over the bank in an all-share deal which also includes extensive Swiss government and SNB guarantees. 

At the weekend there were reports that Credit Suisse had pushed back after it was reported that UBS was putting a price tag of up to $1bn on the embattled business, a price of CHF0.25c a share, paid in UBS stock, a number that was well below Credit Suisse closing share price of CHF1.86c on Friday. The weekend deal, which still sees UBS pay CHF0.76c in its own stock, also sees the Swiss National Bank offer a further CHF100bn liquidity line and the Swiss government a loss guarantees of CHF9bn, in the event, UBS bears up to CHF5bn of losses on certain assets.

With memories still fresh of how Lloyds Banking Group was forced into a shotgun marriage with HBOS back in 2008, and how ruinous that has been for long-term shareholder value, UBS was quite within its rights to assign a knockdown value on a bank where due diligence would take months to undertake. Some have suggested that UBS putting such a low-ball number on its interest means that Credit Suisse could be in more trouble than perhaps regulators are letting on, and while that might be true, it could also be UBS management being extremely cautious. 

After all, with so little time in which to do due diligence, there could be all manner of hidden nasties lurking on its balance sheet, and while the eventual $3.2bn number came in higher than the initial $1bn offer, UBS is still taking a big gamble even as it tries to ensure that its shares don’t get clobbered when they open later today. 

With Credit Suisse shareholders and some bondholders taking a huge hit, banks in Asia have taken a hit on similar concern about their AT1 bond holding values, while the weekend deal still presents the Swiss National Bank and Swiss government with untold headaches, with the size of the newly merged bank set to dwarf the size of the Swiss economy. The phrase "too big to fail" really does spring to mind here, and this morning’s weakness in Asia markets serves to reinforce concerns about these types of writedowns and any spillover effects on the rest of the banking sector.  

As for Credit Suisse, it is in no position to dictate the price of any rescue package given the problems it was facing, and if its shareholders are unhappy with the price they’ve got, they should have stumped up the extra cash themselves!

Looking ahead to this week, the resultant market turmoil from last week’s events in Europe, as well as the events in the US around Silicon Valley Bank, Silvergate, and Signature Bank, have brought this week’s Federal Reserve rate decision into sharp focus, prompting some to suggest that the Fed may well pause, or even cut rates this week. In an attempt to head off any potential problems, central banks have also increased the frequency of their US dollar swap operations to a daily occurrence until the end of April at least, to ensure financial conditions don’t tighten too much. 

With concerns over US and European banks likely to be still front of mind, there is certainly a case for central banks to be cautious about the message they send about future rate rises, while financial stability is also part and parcel of their core mandate. Despite this, they also have to deal with concerns about sticky inflation, and unless they clamp down on rising prices, then today’s problems could become even worse in the short term. 

In a sense, the problems being caused by rising interest rates are a direct consequence of the very same central bank policies of easy money being allowed to continue for far too long, and now they are faced with having to put the genie back in the bottle. This means a rate cut this week is unlikely, and could even be unwise as it would suggest that the current problems are even more serious than markets currently believe. 

Last week the ECB decided to press on with a 50 basis-point rate hike, however on this occasion very sensibly made any further rate rises very much data dependent, meaning that after this week, further rate hikes may well get deferred until things have settled down. Against such a difficult backdrop it's hard to imagine that only two weeks ago, further rate rises this week were a nailed-on certainty, for both the Federal Reserve, as well as the Bank of England. Now it seems very much an each-way bet, between a hike or a pause, despite recent economic data on both sides of the Atlantic coming in better than expected. 

Now, as a result of some significant financial contagion caused by poor risk-management practices at a number of small US tech lenders, and a loss of confidence in Credit Suisse after a major shareholder ruled out putting in more capital, we could well find that we’re at or close to a rate-hike peak. That doesn’t mean rates will come down quickly, however, it just means that rates could stay at highly elevated levels for a long time to come, in the hope that inflation will eventually return to target over a much longer period of time.    

EUR/USD – finding decent support in the area of 1.0510/30 area, with more solid support at 1.0480. Last week’s highs at 1.0760 is a key resistance.

GBP/USD – found support at the 1.1800 area earlier this month before rebounding back to the 1.2200 area. Currently rangebound between the recent peaks just below 1.2300, with a break below 1.1800 opening up the risk of a move towards 1.1640.

EUR/GBP – ran out of steam at the 0.8920 area and has subsequently slipped back towards trend line support at 0.8720, from the lows last August. A break below 0.8700 could well see further losses towards 0.8620.

USD/JPY – the failure to push above the 200-day SMA, earlier this month has seen the US dollar slide back, with the next key support at the 130.00 area. Resistance currently lies back at the 135.10/20 area. 

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