What a week in the markets. The US banking contagion spread to Europe this week, with fear spiking in the market that the demise of Silicon Valley Bank (Nasdaq: SVB) and Silvergate could have knock-on effects for the health of the entire banking market.
The Credit Suisse share price (SWX:CSGN) closed down 24% Wednesday at 1.70 CHF, marking a spectacular all-time low. The bank is now 97.8% off its all-time high. And you thought cryptocurrency was bad!?
The fear spiked to such a degree that the Swiss National Bank was forced to step in, with Credit Suisse to borrow up to 50 billion CHF ($54 billion). It will also buy back 3 billion CHF of its own debt, stating that it is “taking decisive action to pre-emptively strengthen its liquidity”.
At press time, the stock has bounced up over 22%, trading at 2.08 CHF, as investors’ worst-case scenarios were dispelled by the lending announcement.
For Europe, a continent still suffering from PTSD stemming from the 2008 crisis, which saw a number of states require bailouts (including my very own, Ireland, after some absolutely spectacular banking failures), it marks the most turbulent week in recent memory.
The next big thing is the European Central Bank (ECB) and its decision on rates, an event which always throws turbulence into the market.
The ECB is set to announce its latest rate decision Thursday at 9:15 AM Eastern time. It will be the first bank to face the music following the chaotic banking developments. Looking stateside, expectations in the US immediately flipped regarding the future path of interest rates after the SVB collapse (I wrote about this earlier this week).
Indeed, the market in the US is pricing in one more hike until the terminal rate is reached and cuts will begin.
In Europe, we will get an updated picture on how things stand today. Banks on the continent are certainly better capitalised than they were in the GFC, and should have better liquidity and interest rate management (which is what sank SVB) than their US counterparts.
With this in mind, some still think the discourse out of the meeting Thursday will be hard-lined against inflation. It is also important to note that the tightening in the US has been far swifter than what we have seen in Europe, who have not hiked rates to the same extent.
Prior to the banking turmoil, the ECB had promised a 50 bps hike. The market had priced this at 100% last week, backing out market-implied probability from the futures.
Today, that sits at 50%, although this is up from the 20% chance it briefly hit yesterday.
Thus, the ECB’s decision is very much on a knife edge right now, with analysts debating what they think. It is the conflicting cases of high rates to combat inflation, but low rates to avoid more turmoil.
It sits as a pivotal meeting and therefore volatility should be expected in the markets, no matter what way it goes.
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