Bonds rallied as investors turned to the safest assets while they assessed moves by authorities to ensure stability in the banking sector. US equity futures and European stocks erased earlier losses following the government-brokered weekend sale of Credit Suisse Group AG to UBS Group AG.
(Bloomberg) — Bonds rallied as investors turned to the safest assets while they assessed moves by authorities to ensure stability in the banking sector. US equity futures and European stocks erased earlier losses following the government-brokered weekend sale of Credit Suisse Group AG to UBS Group AG.
Contracts on the S&P 500 were steady as major lenders JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. trimmed US premarket declines. Nasdaq 100 futures turned higher. The Stoxx Europe 600 index was modestly higher, with banks and financial services still the sharpest fallers. UBS shares sank as much as 16%, while Credit Suisse sank 60%. A gauge of Asian shares fell by more than 1%.
Policymakers are rushing to shore up confidence after the problems at Credit Suisse and the collapse of Silicon Valley Bank added to broader concerns over financial stability. The Federal Reserve and five other central banks announced coordinated action to boost liquidity in US dollar swap arrangements to ease strains in the global financial system. Traders are also assessing what impact recent events will have on the path of Fed policy tightening in the runup to its next rates decision due Wednesday.
“Assuming these banking stresses do not evolve into something more serious, the European Central Bank and the Fed may perceive that they are at or near their objectives with current policy,” said Brad Tank, chief investment officer for fixed income at Neuberger Berman. “The Fed, in particular, is further along in its tightening cycle and should have more flexibility to pause — and markets are indeed pricing for 2023 fed funds rate cuts once again.”
The anxious start to the trading week prompted a flight to safety, with German and UK government bonds rallying. The policy-sensitive two-year Treasury yield fell 11 basis points, while 10-year yields dropped to the lowest since September. Gold rose above $2,000 an ounce for the first time in more than a year.
Among the biggest losers in the Credit Suisse sale are investors in the bank’s riskiest bonds, known as AT1s, worth $17 billion. These money managers are set to be wiped out as the bonds become worthless due to the use of public funds for the rescue. The Swiss National Bank is offering liquidity assistance to UBS while the government is granting a guarantee for potential losses from assets UBS is taking over.
“The AT1 wipe out of CS is a wake-up call for investors of that segment and will prompt a significant re-evaluation of those bonds,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “That could lead to higher funding costs for European banks going forward.”
A measure of dollar strength swung between small gains and losses. The Swiss franc and the euro fluctuated, while the yen gained. Oil sank, with US benchmark West Texas Intermediate plunging below $65 a barrel to hit the lowest level since late 2021.
Meanwhile, Morgan Stanley strategist Michael Wilson said the stress in the banking system marks what’s likely to be a painful and “vicious” start of an end to the bear market in US stocks. The S&P 500 will remain unattractive until equity risk premium climbs to as high as 400 basis points from the current 230 level, according to Wilson, who is known for being one of Wall Street’s staunchest bears.
Much of the debate in markets is now focused on whether the Fed will deliver another quarter-point hike or pause at its March 21-22 meeting, amid the heightened financial instability and a softer-than-forecast reading on inflation expectations on Friday. Traders no longer see much chance of a bigger half-point hike that Chair Jerome Powell had put on the table just before concerns about financial stability emerged.
“What last week did was bring forward the peak in the rates cycle, which is a positive,” said Kenneth Broux, a strategist at Societe Generale. “All we have been doing in the past month is debate whether the Fed funds rate will be 5.5 or 6%, but now markets are pricing that the peak is probably going to be closer to 5.25% rather than 6%.”
Elsewhere in markets, Bitcoin rose to its highest level since June, prompting gains in cryptocurrency-exposed stocks.
Key events this week:
- ECB President Christine Lagarde appears before European Parliament’s economic committee, Monday
- US existing home sales, Tuesday
- US Treasury Secretary Janet Yellen to appear at Senate subcommittee hearing, Wednesday
- FOMC rate decision, news conference from Chair Jerome Powell, Wednesday
- EIA crude oil inventory report, Wednesday
- Eurozone consumer confidence, Thursday
- BOE interest rate decision, Thursday
- Swiss National Bank rate decision and press conference, Thursday
- US new home sales, initial jobless claims, Thursday
- US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday
- Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
- US durable goods, Friday
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 was little changed as of 10:24 a.m. London time
- S&P 500 futures were little changed
- Nasdaq 100 futures were little changed
- Futures on the Dow Jones Industrial Average fell 0.2%
- The MSCI Asia Pacific Index fell 1.1%
- The MSCI Emerging Markets Index fell 0.9%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.1% to $1.0682
- The Japanese yen rose 0.5% to 131.20 per dollar
- The offshore yuan rose 0.1% to 6.8790 per dollar
- The British pound rose 0.2% to $1.2199
Cryptocurrencies
- Bitcoin rose 0.6% to $28,135.12
- Ether fell 1.2% to $1,778.08
Bonds
- The yield on 10-year Treasuries declined eight basis points to 3.35%
- Germany’s 10-year yield declined seven basis points to 2.04%
- Britain’s 10-year yield declined nine basis points to 3.19%
Commodities
- Brent crude fell 2.2% to $71.34 a barrel
- Spot gold fell 0.3% to $1,984.24 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Kurt Schussler, Georgina Mckay, Tassia Sipahutar, Joe Easton and Sujata Rao.
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