Regional Banks Rebounded Awaiting the Fed's Rate Decision

Barry Adams
20 Mar, 2023
New York City

Financial markets closed higher on Monday after Switzerland rescued Credit Suisse and six central banks worked together to provide liquidity if needed.  

After months of fruitless actions and search for additional capital, Credit Suisse was forced by the Swiss government to merge with UBS and prevent a wider fallout in the global banking sector.  

Swiss regulators and the central bank engineered takeover of Credit Suisse by UBS. 

The move was widely anticipated by investors after Saudi National Bank, the largest stockholders in the second-largest Swiss bank, was unable to add more capital in the bank citing regulatory limitations. 

Credit Suisse has been on the radar of Swiss regulators and the central banks, after deposit outflows picked up in the last nine months. 

For months, UBS was reluctant to acquire the second-largest bank on the worries of the quality of the bank's assets and the negative impact of the global economic slowdown.  

Global markets looked beyond the "shotgun wedding" between the two Swiss banks but ripple effects are expected to be felt by global investors for months to come.  

 In New York Treasury bond yields rebounded from the six-month lows and crude oil dropped to a new 15-month low after the expected increase in China's demand growth failed to materialize following the ending of zero-covid policy in China for a month.  

Despite the forced purchase of Credit Suisse by UBS, there is no end in sight for the capital shortfall at the U.S. regional banks and a rise in interest rates will only make unrealized losses larger in the banking system.  

Investors are also bracing for higher rates at the end of a two-day policy meeting of the Federal Reserve on Wednesday. 

The Federal Reserve is expected to increase rates by at least 25 basis points, despite the ongoing financial instability in regional banks. 

A total of 75 mid-sized or regional banks with assets between $50 billion and $200 billion are responsible for about one third of the U.S. lending. 

Higher rates will force these institutions to redirect larger shares of future earnings to fill the capital shortfalls from these unrealized losses in the portfolio holding Treasury securities. 

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.9% to 3,951.57 and the Nasdaq Composite index advanced 0.4% to 11,675.46. 

The yield on 2-year Treasury notes increased to 3.98%, 10-year Treasury notes 3.48% and 30-year Treasury bonds advanced to 3.67%. 

Crude oil increased 82 cents to $67.56 a barrel and natural gas prices fell 10 cents to $2.23 a thermal unit. 

 

U.S. Movers 

Credit Suisse Group AG plunged 52% to 96 cents in New York trading after the troubled Swiss bank agreed to be acquired by the rival UBS. 

In a deal negotiated by the Swiss regulators and the Swiss National Bank, UBS agreed to pay 50 Swiss cents per share or $3.25 billion, significantly less than the expected price for shareholders. 

The Swiss National Bank agreed to provide up to 100 billion Swiss francs in liquidity and the Swiss government will offer a loss guarantee of up to 9 billion Swiss francs but UBS will be responsible for the first 5 billion Swiss francs of potential losses. 

Total assets held by Credit Suisse had declined to $70 billion just before the announcement of the transaction, indicating that a substantial part of the assets may be impaired or is expected to be impaired. 

The deal orchestrated by the Swiss regulators and the central bank will pay stockholders but will write down $17 billion of AT1 bondholders which generally have a higher priority than shareholders in the credit structure.

Regional banks rebounded in New York trading and Western Alliance Bancorp advanced 3%, PacWest soared 16% and Key Corp increased 4%. 

First Republic Bank plunged 15.9% to $19.30 after the rating agency Standard & Poor's lowered its rating on the embattled bank's bonds to B+ from BB+, deeper in the junk bond territory. 

 

European Markets Rebound After Joint Central Bank Actions 

European markets opened lower but turned higher after major central banks announced more liquidity measures following the Credit Suisse rescue by the Swiss authorities. 

On Sunday, after days of negotiations, Switzerland National Bank and Swiss regulators announced a few details of Credit Suisse rescue.  

The shotgun wedding between UBS, the largest Swiss bank and Credit Suisse, the second-largest Swiss bank, calmed financial markets for now.  

The Federal Reserve Bank, the European Central Bank, the Swiss National Bank, the Bank of England, the Bank of Canada and the Bank of Japan announced coordinated measures to increase U.S. dollar liquidity to prevent the fallout from Credit Suisse's in global financial markets.    

Market sentiment was further strengthened after the European Central Bank president Christine Lagarde assured investors in a speech on Monday that the Euro Area banks have more than adequate capital and liquidity needed. 

"The euro area banking sector is resilient, with strong capital and liquidity positions," added Lagarde in a speech to the European Parliament on Monday.  

 

Switzerland Government Forced UBS-Credit Suisse Merger 

Credit Suisse Group AG plunged 52% to 96 cents in New York trading after the troubled Swiss bank agreed to be acquired by the rival UBS. 

In a deal negotiated by the Swiss regulators and the Swiss National Bank, UBS agreed to pay 50 Swiss cents per share or $3.25 billion, significantly less than the expected price for shareholders. 

The Swiss National Bank agreed to provide up to 100 billion Swiss francs in liquidity and the Swiss government will offer a loss guarantee of up to 9 billion Swiss francs but UBS will be responsible for the first 5 billion Swiss francs of potential losses. 

Total assets held by Credit Suisse had declined to $70 billion just before the announcement of the transaction, indicating that a substantial part of the assets may be impaired or is expected to be impaired. 

The deal orchestrated by the Swiss regulators and the central bank will pay stockholders but will write down $17 billion of AT1 bondholders, upending the traditional capital structure in the global banking industry. 

UBS Group AG increased 4% to $18.95 in New York and advanced 1.3% to 17.33 Swiss francs.  

 

Europe Indexes & Yields 

The DAX index increased 1.1% to 14,933.38, the CAC-40 index added 1.3% to 7,013.14 and the FTSE 100 index advanced 1% to 7,403.85. 

The Swiss Market Index increased 0.3% to 10,643.64 after reversing the loss of 1.9% in the first twenty minutes of trading.  

The yield on 10-year German Bunds decreased to 2.21%, French bonds fell to 2.66%, the UK gilts to 3.30% and Italian bonds to 3.97%. 

The euro inched higher to $1.07, the British pound to $1.22 and the Swiss franc to 92.90 cents. 

Brent crude oil increased 88 cents to $73.84 a barrel and the Dutch TTF natural gas price fell 3.52 to 39.33 per MWh. 

 

German Wholesale Inflation Eased After Energy Prices Declined 

Germany's producer price index, a measure of wholesale inflation, declined for the fifth month in a row and approached the lowest level in eighteen months, the latest data from the Federal Statistics Office or Destatis showed today. 

The producer price index increased 15.8% from a year ago in February, slower than the 17.6% rise in January. 

The latest increase in prices was the smallest since September when prices rose 14.2%. 

 

Euro Area Good Trade Deficit Slightly Widened In January  

The Euro Area international goods trade deficit slightly widened in January, the latest data from the Eurostat showed Monday. 

The international good trade deficit increased to Є30.6 billion in January from Є30.2 billion a year ago. 

Imports increased 9.7% to €253.5 billion from €231.1 billion and exports advanced 11.0% to €222.9 billion from €200.8 billion a year ago. 

 

Europe Stock Movers 

FirstGroup Plc declined as much as 1% but closed a fraction down to 104.50 pence despite the company extending its partnership to October 2023 with the Department for Transportation and HS2 Limited. 

FirstGroup and Trenitalia are working together with the UK government in the largest infrastructure project in Europe to build high-speed rail service for the West Coast Partnership. 

Spectris Plc increased 0.1% to  3,457.25 pence after the company said it initiated the third tranche of its stock repurchase program. 

Between March 20 and July 31, the company plans to acquire its stock not to exceed 9.711 million shares for a total purchase price not to exceed £40 million.