Our head of investment rounds up the morning's big news.
Sentiment has turned more positive across European markets, with banks outperforming after the turmoil in recent sessions. The FTSE 100 has opened higher with Barclays (LSE:BARC), NatWest Group (LSE:NWG) and Lloyds Banking Group (LSE:LLOY) trading near the top of the basket.
UBS Group AG (SIX:UBSG) is in the green while Credit Suisse Group AG (SIX:CSGN) remains under pressure as investors digest the arranged marriage. Improved risk appetite is dampening demand for safe-haven stocks like Fresnillo (LSE:FRES) and Haleon (LSE:HLN) which are lagging broader gains on the UK large-cap index.
Focus turns to the Federal Reserve’s two-day policy meeting which begins today. Markets are pricing in around a 70% chance of a quarter percentage point rate hike on Wednesday, with 30% chance of no change in what is shaping up to be one of the most uncertain decisions of the current rate hiking cycle.
Monetary policymakers are weighing up the extent of the lingering inflationary pressures versus the potential deflationary impact of the banking crisis following SVB’s collapse and Credit Suisse’s takeover. The US dollar is languishing near five-week lows, reflecting the uncertainty around this week’s Fed decision.
Oil prices continue to face selling pressure, with WTI trading below $67 a barrel. The banking uncertainty has sparked concerns about a US recession and weaker global demand. Focus will be on the next OPEC+ meeting on 3 April.
CREDIT SUISSE / UBS
Up to a third of the 120,000 jobs in the combined UBS / Credit Suisse group could be let go. According to the Financial Times, tens of thousands of staff could be cut, with Credit Suisse employees most at risk. A major restructuring and cost cutting programme was already underway at the embattled lender before the Swiss authorities arranged the rescue deal, with 9,000 jobs cuts planned as well as a major scale back of its investment bank.
The marriage between UBS and Credit Suisse leaves much uncertainty and nervousness among employees who are unsure whether they will be let go. Southeast Asia could be the region most at risk to job cuts given that it has the biggest overlap in terms of investment banking and wealth management teams.
Meanwhile, legal action is being considered against Credit Suisse after its $17 billion worth of AT1 bonds were written down to zero. PIMCO reportedly lost about $340 million on its Credit Suisse AT1 bonds according to Reuters. One analyst at Goldman Sachs said there is concern about ‘permanent destruction in demand’ in the CoCo bond market. Bondholders typically rank above shareholders in the repayment pecking order when a company fails, yet in Credit Suisse’s case its convertible bondholders have seen their investments wiped out.
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Much uncertainty remains around the future of the Swiss banking group, with the potential for litigation, job cuts, restructuring and outflows. The first step must be to shore up confidence and convince shareholders of potential synergies from the combined group.
Although UBS shares initially reacted negatively on Monday, the stock regained ground and the mood music has brightened across stock markets today, as investors ruminate over the fact that a full-blown collapse of Credit Suisse and another Lehman moment has been prevented, stemming broader banking contagion and a domino effect on the Swiss economy.
UK PUBLIC SECTOR NET BORROWING
UK public sector borrowing hit £16.7 billion in February, the highest monthly figure since records began in 1993. It was sharply above forecasts for £11.4 billion, a jump of £9.7 billion from February 2022 and an increase of £15 billion from before the pandemic in February 2020. The public sector budget deficit reached £10 billion, £7.8 billion more than in February 2022. The debt-to-GDP ratio currently stands at 99.2%, the highest since the early 1960s. Interest payable on central government debt hit £6.9 billion, down £1.3 billion year-on-year, marking the first annual fall since April 2021.
Falling debt interest costs year-on-year reflect the smaller growth in RPI between November and December as inflationary pressures start to ease. However, government expenditure remains elevated partly because of spending on energy support schemes.
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