CS Buys Time, Stock Market Rally Underwhelms

Torschlusspanik?

Credit Suisse might have a French sounding name, but the Swiss banks are German in their mindset and language. Last night the Swiss National Bank said it would provide liquidity to Credit Suisse ‘if required’. It had a sniff of “Torschlusspanik, or ‘gate closing panic’. That requirement was immediate: CS said it would borrow up to CHF50bn and buy back roughly $3bn in senior debt. The Swiss bank seemed irked. Chairman Axel Lehmann had said earlier that state aid ‘isn’t a topic’. So, you felt the Weltschmerz, or world weary, tone when CS said in a statement overnight that it was “taking decisive action to pre-emptively strengthen its liquidity”.  And even more when it reminded the market about its CET1 ration of 14.1% and liquidity coverage ratio of 144%, now improved to 150%. “Credit Suisse is conservatively positioned against interest rate risks,” the bank proclaimed with a yawn.

As Barclays analysts note, “confidence crises can spiral into solvency issues”. So, is the liquidity injection enough to steady the ship? Shares rallied in the US on the SNB announcement, sending the New York listed stock to $2.16, up sharply from the $1.76 open, but still down 14% on the day.

Following the decision by the bank to draw the CHF50bn, shares in CS in their home market rallied 20-40% in very volatile trade at the open and bonds jumped. After 30 mins we had it up around 23% but it’s moving a lot. Five year credit default swaps eased 128bps from Wednesday’s close. JPM retains an overweight rating on CS and says the lifeline will buy it time for restructuring. 

We don’t know if CS shares hold these gains or if it’s enough to dampen down volatility in the broader market – it seems to have done so far. BBG reports a CEO memo told staff to ‘focus on facts’...plans to streamline, continue overhaul. My view is that once it comes to the central bank saying it will provide liquidity the game is effectively up, but this is not ’08 and Switzerland is not Wall Street or London. They are better capitalised today. What comes next? It depends what is the cause of the trouble – one is the massive outflows. Does this stop, or reverse? What have the outflows been like – Q4 outflows were huge. Net outflows hit CHF110.5bn in the fourth quarter, taking the annual asset outflows for 2022 to CHF123.2bn. Surely the last week has been worse?

Waldeinsamkeit is another German phrase that CS might relate to – a feeling of being alone in the woods. The question is: after night’s intervention, is CS out of the woods or will investors and deposit holders still be feeling Zeite Heimat – a longing for escape.

Markets a Mixed Bag

European bank shares were higher with the main banks up 2-4%. The FTSE 350 banking index rose 3% in early trading. UniCredit rose 4%, UBS +4.5%.  But these banks are still down heavily over the last week: UBS -7%, UniCredit -10%, HSBC -9%, Standard Chartered -13%.

Broader indices also recovered some ground, with Frankfurt, Paris and London rising more than 1% in early trade. But we are not recovering anything like the 3-4% declines of yesterday. The FTSE 100 rose more than 100pts, or about 1.4%, but still languishes under 7,450 and was paring gains as of send time. After such a heavy drubbing yesterday, the gains this morning are fairly underwhelming – not to say they won’t pick up later, a lot depends on CS sentiment and the ECB later.

The US closed broadly lower yesterday but off the lows and the Nasdaq Composite actually notched the narrowest of gains as yields compressed. Futures are looking higher with the positive mood in Europe. Regional banking indices were weaker but losses fairly contained. JPM lost almost 5%.

Yields are a bit higher with the US 10yr at 3.50%, having hit 3.390% yesterday, whilst the 2yr is hovering around the 4.0% level, having fallen from 4.40% to lows around 3.70% yesterday. Bonds had been heavily bid on a kind of fear trade as well as repricing for how far central banks now hike.

Risk-on flows pushed the dollar lower, with DXY futures testing support at 104 and pushing a little lower. OIl pushed up, with April WTI futures rising to $68 from a $65 handle struck yesterday. Gold is off the highs but still bid at $1,921.

SVB: Get this

Silicon Valley Bank is now marketing itself as the single safest "place to keep or transfer your deposits (fully insured with no limits or caps)." In a conference call, new CEO Mayopoulos “There is no safer place in the U.S. banking system to put your deposits.” You cannot make it up. Talk about moral hazard (and I have). But I guess he has a point. 

Ultimately it comes down to this – do you really want to privatise the upside and socialise the losses? Because I don’t want that as a system – but that is what we are basically left with.

ECB day

The European Central Bank meets today. The ECB is key in terms of guiding for how they see the situation not just vis-a-vis Credit Suisse but also wider implications for banks, inflation and economy. It would seem that 50bps is now off the table – 25bps walks the line to say ‘we’re aware that rising rates is a problem, but we are not panicking by pausing’. The problem for the ECB is thus: if they go for 50bps as they had guided just a few days ago, and it all goes to pot again, then everyone will do a post-match dissection of why they got it wrong.

And the Fed?

“It is more important ... not to take risks with the stability of the system than to reassert your determination to fight inflation. After the hikes of the past year, no one doubts that. And if the Fed skips next week, they could always hike in May ... or even before the meeting if the March labour market and inflation data are too strong for comfort. Waiting a few weeks is a small price to pay for not taking a chance on destabilizing the entire financial system.” - Pantheon

That’s one view. Can the Fed really go from higher for longer to inflation as yesterday’s worry in such a short space of time? It’s alarming but it could happen – again it depends on what kind of effect the events of the last few days have on not just financial stability – which is an immediate concern for next week, but looking past our shoes a bit, also on inflation. Note for example PPI way below forecast and Empire State Mfg index -24.6, vs. estimate -7.9 - declines in the measures of prices paid and received by the state’s manufacturers, indicating that while inflationary pressures are stubborn, they are easing somewhat. This is what the PPI also showed, cooling to 4.6% from 5.7% in January.

There is a belief that the events of the last few days has done the job for the Fed. Banks won’t be lending - loan origination falls, which will bring inflation right down. Less lending not about systemic risk but about lack of liquidity, higher deposit costs, tough regs for smaller banks. Banks will need to be and want to be more risk averse and this should curtail inflation.