UBS Buys Credit Suisse to End Stress

UBS bought Credit Suisse (CS) in a government-brokered deal for 0.76 cents of franc per share, or CHF3bn in total.

The Swiss National Bank (SBN) offered UBS $100 billion in liquidity to make sure that the takeover would go smoothly, and Swiss government offered 9 billion francs guarantee on CS losses. The deal triggered a complete write-down of all CS’s additional tier 1 bonds.

US Dollar weakened and US futures opened in the positive but reversed losses while the Japanese Nikkei fell 1.42%, Hang Seng dropped more than 3%.

The next few hours of trading will give us a better picture on whether the crisis is contained. In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis – which doesn’t concern UBS – a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB and the government.

Fed decision time

So, if all goes well, shaky days across banks will soon be left behind and investors could concentrate on the Federal Reserve (Fed) decision.

One thing is important to note: the Fed’s Quantitative Tightening (QT) was clearly out of the window since the Silicon Vally Bank (SVB) debacle. The Fed’s balance sheet ticked higher last week, to help easing stress across banks.

But the QT and last week’s emergency intervention are conceptionally different.

And more interestingly, while we could think that the reverse-QT, could have some negative implications for inflation – because the Fed is adding liquidity into the system – an index on financial conditions in the US suggests that the financial conditions have tightened sharply since last week, to the tightest levels since last fall and that could be an argument for the Fed to pause its rate hikes.

But perhaps not from this week. The expectation for this week’s meeting is still a 25bp hike from the Fed. Activity on Fed funds futures gives around 60% chance for a 25bp hike this Wednesday.

The March dot plot and Powell’s accompanying statement will be as important as the rate decision.

On the data front, US short-term inflation expectations fell in March to the lowest levels since 2021. That’s excellent news for the Fed’s inflation battle as inflation expectations have a material impact on where inflation, itself, is headed.

A boon for the Big Tech

The banking turmoil has been a boon for the tech stocks last week. The sharp fall in rate hike expectations which resulted in a sharp fall in yields drove more than $500 billion in market value to Microsoft, Apple, Google and Amazon last week.

Microsoft rallied more than 15%, Amazon gained almost 15% as well and flirted with the $100 psychological mark. Same with Google, it also gained around 15% and closed the week above the $100 for the first time since the beginning of February, while Apple added 6%.

And Bitcoin, which has a strong correlation with tech stocks, gained 45% since the March 10 dip – and more importantly, showed that it could act as a hedge to a global bank stress.

It’s yet to be seen whether the Big Tech could hold on to their gains if the Fed brings its inflation battle back on the table.

Oversold

Crude oil kicked off the week under pressure, below the $70pb level as the bank stress weigh on global growth prospects and sent the price of a barrel below this psychological level. The RSI indicator suggests that the American crude stepped into oversold market conditions, meaning that crude oil has been sold too fast in a too short period of time, and a positive correction would be healthy at the current levels.