March 20, 2023
Good morning,
The Swiss government appears to have forced a shotgun sale of Credit Suisse (CS) to UBS (formerly named Union Bank of Switzerland) over the weekend, and while only last week this combination was expected to be an elixir of any approaching European bank crisis, it is this morning nothing of the kind. The reason for the poor market reception is complicated and connected to collapse of a bond portion of the CS capital structure. Fortunately, this appears to be a Swizz-only ruling and does not carry over to other eurozone or U.S. banks. There were no moves over the weekend by U.S. authorities to ease our regional bank liquidity crisis on our shores. And so, the makings of another global financial crisis on both continents continues to dominate all market narratives this morning.
It would have been nice if the regional bank debacle had cleared before this week’s Fed meeting (concluding Wed), but the odds of that are looking low this morning. First Republic Bank (FRC) suffered yet another downgrade by the ratings agency this morning and has the stock trading at $19-ish/shr pre-market, down from Friday’s close at $23.03. For several reasons, FRC’s stock price has become a weathervane for the regional bank crisis in general.
Many voices are calling for a pause by the Fed this week and if there is not an improvement on our banking crisis front, that is probably what we’ll get. Market stability is one of the Fed’s chief priorities. With any improvement in the liquidity picture between now and Wednesday afternoon, I suspect the Fed will hike +25 basis points and say the bar is high for another near-term rate hike due to rising financial risk.
Be well,
Mike