Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Bank stocks gain as markets digest Credit Suisse rescue

Published 03/19/2023, 06:38 PM
Updated 03/20/2023, 05:21 PM
© Reuters. FILE PHOTO: A man walks past an electronic board showing Japan's Nikkei average and stock prices outside a brokerage, in Tokyo, Japan, March 17, 2023. REUTERS/Androniki Christodoulou

By Koh Gui Qing and Marc Jones

NEW YORK/LONDON (Reuters) - Bank stocks rallied on Monday and a cross-asset scramble for safety abated, as investors heaved a tentative sigh of relief that a historic weekend rescue of financial heavyweight Credit Suisse is containing the banking crisis for now.

Sunday saw the most dramatic state intervention since the 2008 global financial crisis, with UBS buying Credit Suisse for 3 billion francs ($3.2 billion) in a takeover backstopped by unlimited funding pledges from the world's top central banks.

The speedy orchestration of Credit Suisse's takeover was received by investors as an acceptable measure to stem contagion, but fears that other struggling banks might teeter next kept markets on edge.

"While the Credit Suisse rescue might draw a line under that particular institution’s problems, it is clear that confidence in the financial sector overall is still extremely fragile," said Vicky Redwood (NYSE:RWT), a senior economic adviser at Capital Economics.

Indeed, shares of First Republic Bank (NYSE:FRC), the lender drawing the most concern from U.S. investors right now, bucked gains on Wall Street and cratered 47.1%, after S&P Global (NYSE:SPGI) downgraded its credit ratings deeper into junk on Sunday.

The Dow Jones Industrial Average jumped 1.2%, the rose 0.9%, and the Nasdaq Composite Index gained 0.4%.

The KBW Bank Index, a proxy for banks, jumped 0.8%.

The latest banking crisis started after two U.S. lenders, Silicon Valley Bank and Signature Bank (NASDAQ:SBNY), collapsed this month, while First Republic Bank has so far failed to shore up investor confidence despite having received emergency support.

Losses in European bank shares also recovered, climbing 1.3% after initially dropping 6%, as investors digested the support efforts and the pace at which they had come. Credit Suisse's own shares slumped 55.7% and those of its acquirer UBS jumped 1.3% after tumbling nearly 13% earlier in the session. (EU)

The broader European STOXX 600 index also managed to make it into positive territory to be up 0.98%.

"Credit Suisse is our Lehman moment in Europe, but we recognise that and we are not going to make the same mistake," Close Brothers Asset Management Chief Investment Officer Robert Alster said of the speedy action by authorities over the weekend.

He said the European Central Bank, Bank of England and others would be well aware "of the next gazelles in the chain that the lions will be hunting" - meaning other large banks with investment banking arms such as Deutsche Bank (ETR:DBKGn), BNP in France or Barclays (LON:BARC) in the UK - and will step in with support if needed.

"There is a lot of firepower from the authorities to counter what is the steadily eroding loss of confidence," Alster said.

Gains in stocks were accompanied by higher Treasury yields, as bond investors weighed the chances of whether the Federal Reserve will skip raising interest rates when it meets this week given the upheaval among banks.

Fed funds futures show a 26.9% probability of the Fed holding its overnight rate at a current 4.5%-4.75% when policymakers conclude a two-day meeting on Wednesday, CME's FedWatch Tool shows.

The yield on benchmark 10-year Treasury notes rose to 3.4866% compared with its U.S. close of 3.397% on Friday. The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 3.9700% compared with Friday's close of 3.846%. [USD/]

Yields on triple A-rated German Bunds, which fall as bond prices rise, had hit their lowest since mid-December at 1.951% in the early panic but had shuffled back above 2% as markets began to relax a little.

Risk aversion had also seen the spread between riskier Italian debt and German debt widen out to over 200 basis points again, but that gap - which reflects how much more Rome has to pay to borrow than Berlin - also improved. [GVD/EUR]

"There was nothing great that could come out of this, but it is probably the best of a bad list of outcomes," said AXA Chief Economist Gilles Moec, who had been surprised by the initial rout.

"All in all this was pretty swift," he added. "And in terms of reassurances (from authorities) it is pretty decent."

GRAPHIC: Credit Suisse goes off piste Credit Suisse goes off piste (https://www.reuters.com/graphics/CREDITSUISSEGP-STOCKS/akveqegdgvr/chart.png)

AT1s RIP?

The rudest shock in the rushed deal to save Credit Suisse was reserved for the holders of the bank's riskiest tranche of bonds, known as AT1s, which can be converted into equity when troubles hit.

Not only did they discover they are the only investors not getting any compensation from the rescue, but they also found that the long-established practice of giving bondholders priority over shareholders in debt recovery had been turned on its head.

The result was a sell-off in a swath of Asian AT1s overnight, but European supervisors stepped in there too, reassuring European traders that Swiss authorities' actions were not likely to be replicated in the European Union.

"This approach (of hitting shareholders before bondholders) has been consistently applied in past cases and will continue to guide the actions of the SRB (Single Resolution Board) and ECB banking supervision in crisis interventions," they said in a statement.

"Additional Tier 1 is and will remain an important component of the capital structure of European banks," they added.

Safe-haven demand eased in the currency markets, with the Japanese yen flat after gaining as much as 0.75% overnight, while both the Swiss franc and the euro started to rise against an unusually subdued U.S. dollar, which is normally a winner in turbulent times. [/FRX]

Oil prices recovered some ground in volatile trade after diving to their lowest levels in 15 months as the market worried that risks in the global banking sector could spark a recession that would sap fuel demand. [O/R]

© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 16, 2023.  REUTERS/Brendan McDermid/File Photo

West Texas Intermediate crude futures rose 1.09% to $67.47 a barrel, and Brent crude rose 1% to $73.7.

Gold prices pulled back in choppy trade after hitting a one-year high earlier. Spot gold prices fell 0.45% to $1,978.57 an ounce, after touching a peak of $2,009.59 an ounce. [GOL/]

Latest comments

Crude oil price $PPB is seeking Putin's age
The financial system is completely doped by the instant liquidity of the American Reserve and subsidiarity ECB, here again we must deal with more devaluation inflation, cause effect phenomenom.
Get you money out of stocks now!
Yeah, investors are digesting it like unchewed steak.  The Stock Market is getting ready for a Hurricane Crash with market triggers kicking in.  We are in a World of CERTAINTY.  The certainty is that pretty much all the banks around the World are holding Toxic Paper that would make Derivatives look good.
Just months ago Powell called inflationary transitory. Now he will say today’s volatility is transitory.
I like the constant fear-mongering in here.. makes the chickens run off to sell to me in sheer panic..💰💰💰
Fear Mongering????  The Banks are all holding WORTHLESS TOXIC PAPER no different than the value of Derivatives.  DUDE, we are in Trouble.
I think it's all a set up. I wouldn't be surprised if we had a big bounce. but foesnt hide the fact ee are in big trouble globally
Its pretty easy to make arguments either direction right now.
no no no!  we are going to see markets triggers on the way down.  the goose is in the oven and it is cooked.  no sugar coating this one.
Central banks are throwing everything at the wall and seeing what sticks. Do not believe they have it under control (yet). Therefore, I suggest moving all cash to Canada's 5 banks or to only top 3 US banks where I KNOW with high certainty that they will be backstopped. The downside of not moving and keeping cash in small &medium-sized banks is just too great imho.
nah... do you guys see that.. after few hours, same articles but different ending... Reuters lol
Reuters = Bloomberg = FT = WSJ = CNN = BBC = ...etc. You get the picture. Mouthpieces
Same old recycling manipulative news.........fearful news before US market opening but miraculously turn to good news after lunch........
After few hours, Reuters:market down as investor worries bank crisis. Same articles
Up for retailers. Then huge dump after soon
Makes total sense. One Swiss bank buys out the other, financial world built on house of cards but hey, all is well! To the moon!!
This will go down.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.