The purchase of Credit Suisse by UBS was meant to reassure global financial markets, but the selling continues Monday. Our head of markets explains why.
Markets are set for another bumpy ride this week, despite a couple of developments at the weekend designed to stem the tide of sellers among financial stocks.
US markets ended last week on the back foot, with investors unwilling to take positions ahead of what could potentially be – and indeed was – an eventful weekend. In particular, the difference between difficulties at regional US banks and an established European name underlined the escalation of the situation and investors reacted accordingly.
On Sunday, UBS Group AG (SIX:UBSG) announced that it would be buying the beleaguered Credit Suisse Group AG (SIX:CSGN) in an emergency purchase valued at $3.25 billion, representing a deep discount to the closing price on Friday. The deal also involves UBS assuming some $5.4 billion of losses, which reflects the fact that Credit Suisse’s problems had been building for some considerable time ahead of the current crisis of confidence.
There was also a coordinated response from major central banks such as the Federal Reserve, the European Central Bank, the Bank of England and also those of Japan, Canada and Switzerland in enhancing market liquidity. The banks also suggested that loans could be available if needed to other ailing groups and the combined actions of the central banks and the UBS purchase should mitigate some of what could otherwise have been an ugly investor reaction.
However, this now leaves markets at a potential inflection point. On the one hand, there is little question that banks are better equipped to deal with financial shockwaves than at the time of the Global Financial Crisis, due to a combination of regulatory tightening and in particular the strength of the larger banks’ balance sheets and capital cushions.
By the same token, the scale of the response from central banks at the weekend acknowledges gaps in the system, which will leave many investors unwilling to revisit financial stocks until such time as the full extent of the problem is known. In addition, the writing off of junior bondholder debt as part of the UBS/Credit Suisse deal will have analysts running the slide rule over other banks in an effort to detect further potential candidates.
In the US, for example, recent developments suggest that banks could significantly tighten lending rules to borrowers, which could increase the likelihood of recession, alongside what has become an increasingly intriguing Fed meeting later in the week as it announces its latest interest rate decision.
The first possible market reaction to the weekend’s news came in Asia – and it was not a positive one. The Hang Seng in particular shouldered the burden of selling pressure, while even the likes of Standard Chartered (LSE:STAN) and HSBC Holdings (LSE:HSBA) suffered significant share price losses in the region. Most economic news was brushed to one side as investors chose to drift towards haven investments.
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The UK mirrored the theme as financials took another hit between the eyes, with the likes of Standard Chartered repeating its Asian weakness and declining by over 6% at the open. Banks were significantly weaker across the board, suggesting that the scale of investor concerns within the global banking environment have yet to find a bottom.
While miners made a decent effort to shore up the FTSE100, the exposure of the index to financial stocks easily took the upper hand and leaves the premier index down by 2.5% in the year to date, erasing the promising gains of the last few months.
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