By Geoffrey Smith
Investing.com -- Credit Suisse collapses into the arms of local rival UBS in a $3 billion deal that rattles bondholders by wiping out $17B in junior debt, forcing European supervisors to put out a statement that they would handle things differently. The FDIC agrees to sell most of Signature Bank, and most mid-sized regional U.S. banks are inching up in premarket, but First Republic is still falling after another rating downgrade at the weekend. Stocks are holding up surprisingly well, with expectations of an earlier pivot in central bank policy supporting technology stocks in particular. Chinese President Xi Jinping begins a three-day visit to Moscow, only days after the International Criminal Court brought charges of war crimes against his host, Russia's Vladimir Putin. And gold hits $2,000 for the first time in 11 months as havens soar. Here's what you need to know in financial markets on Monday, 20th March.
1. UBS to buy Credit Suisse for $3B; AT1 wipeout shocks junior bondholders
UBS Group (SIX:UBSG) agreed to buy Credit Suisse (SIX:CSGN) for $3B in a hasty deal brokered by Swiss authorities. Credit Suisse suffered catastrophic loss of deposits last weekend and is by far the largest bank to fail in the last decade.
Controversially, regulators FINMA wiped out some $17B in junior debt – so-called Additional Tier-1 (AT1) bonds – as part of the rescue act, despite still allowing shareholders to receive some compensation. While that move was in line with Swiss law, it upset holders of AT1 debt across Europe, pushing bank stocks sharply lower.
The move did, however, sidestep Swiss law by forcing the deal through without the approval of Credit Suisse shareholders. As such, some analysts said legal challenges are to be expected.
2. Central banks agree swap lines to stem contagion; FDIC deal to sell Signature
The Federal Reserve and other central banks moved at the weekend to stop contagion from spreading any further through the financial system, reviving a 2008-era instrument of mutual swap lines to backstop local demand for dollars.
European Central Bank Christine Lagarde is due to address the EU Parliament at 12:00 ET (16:00 GMT) and is sure to be pumped for information on the strength of Eurozone banks, which face the biggest test of their soundness since the euro crisis a decade ago. The ECB and other European supervisory agencies issued a statement welcoming the resolution of Credit Suisse – albeit stressing that AT1 would be senior to equity in any bank resolution in the Eurozone.
The Federal Deposit Insurance Corp. reached a deal to sell most of Signature Bank – one of the three U.S. institutions to collapse this month - to Flagstar, the owner of New York Community Bank. There appears little chance of its SigNet payments system - beloved of crypto platforms - being revived.
The Fed's efforts to underpin regional U.S. banks are still struggling to gain traction, with First Republic Bank (NYSE:FRC) stock marked down another 17% in premarket after Standard & Poor's downgraded its debt again at the weekend.
3. Stocks set to open mixed as bank woes continue to unsettle market
U.S. stock markets are set to open mixed as the rapidly unfolding situation in the banking sector saps confidence from the rest of the market.
By 06:45, Dow Jones futures were down 13 points or less than 0.1%, while S&P 500 futures were up by a similar amount, and Nasdaq 100 futures were also up by 0.1%. The Nasdaq Composite defied pressure from the financial fallout last week, rising 4.6% on perceptions that the Federal Reserve will be forced to cut interest rates to stem the growing sense of crisis.
Regional bank stocks remain front and center amid concern at the fate of First Republic, although PacWest (NASDAQ:PACW), Zions (NASDAQ:ZION), and Comerica (NYSE:CMA) stocks were all up in premarket.
4. Xi to start 3-day visit to Russia
Chinese President Xi Jinping begins a 3-day visit to Moscow, three days after the UN-backed International Criminal Court branded his host, Vladimir Putin, a war criminal.
Xi will tread a fine line between supporting a strategic ally, Russia, and antagonizing the U.S. and Europe, whose economic slowdown is also bad news from China's export-sensitive economy.
Various reports have cited unnamed officials as saying Xi will hold talks with Ukrainian President Volodymyr Zelenskyy after his meetings with Putin, in an effort to appear even-handed. China recently enjoyed a boost to its diplomatic prestige after brokering a deal under which Saudi Arabia and Iran will renew their diplomatic relations.
5. Gold hits $2k as oil slumps again
Gold prices topped $2,000 an ounce for the first time in 11 months, while industrial commodities were mixed on concerns that financial instability will cause a sharp slowdown in advanced economies later this year.
By 06:45 ET, gold had retreated to $1,966/oz from a high of $2,014/oz, while U.S. crude oil futures were down 1.6% at $65.88 a barrel and Brent was down 1.6% at $71.81 a barrel.
Iron ore futures in China fell 2.5%, and nickel fell 1.1% in London, but copper futures edged 1.1% higher, and aluminum rose 0.6%.