FTSE 100 and European markets
Across the pond, European stocks and the FTSE 100 edged lower on Monday as the markets digested the news that UBS is buying Credit Suisse for $3.25bn (£2.65bn).
UBS will assume up to $5.4bn in losses as part of the deal, which is backed by a Swiss guarantee and expected to close by the end of 2023.
Victoria Scholar, head of investment at Interactive Investor, said: “UBS’ acquisition of Credit Suisse is the key focus for markets today with European bourses still under pressure despite the rescue deal.
“The FTSE 100 is trading lower with financials including Standard Chartered (STAN.L), Barclays (BARC.L), Lloyds (LLOY.L) and NatWest (NWG.L) trading at the bottom of the basket. Banks, financial services, and insurance are the worst performing sectors across Europe.”
Banking stocks slide
UBS’ acquisition has done little to allay the market’s unease with banks nursing painful losses across Europe with Credit Suisse opening down by more than 60% and UBS down by over 12%, Scholar said.
“Banks including Deutsche Bank (DBK.DE), Commerzbank (CBK.DE) and BNP Paribas (BNP.PA) are trading sharply lower with German banks understood to have direct financial exposure of at least $11.5bn to Swiss banks,” she added.
“Investors clearly remain extremely cautious towards the sector. A key underlying cause has the backdrop of inflation-combative rising interest rates after the longstanding punchbowl of cheap money was removed. This is having major negative reverberations across the sector and wider markets globally.”
Read more: UK house prices rise by £3,000 in March
The deal’s wipeout of $17bn of the bank’s bonds is also making investors nervous.
“The Swiss regulator Finma decided that CS’s additional tier-1 bonds (AT1) or CoCo bonds worth $17.24bn will be marked down to zero. The Swiss National Bank is providing 100 billion swiss francs for the merged entity as part of the deal to help offset the risk of financial contagion,” Scholar said.
However, UBS CEO Ralph Hamers said the transaction "is financially attractive for UBS shareholders".
Central banks rally together
Following the takeover announcement on Sunday, the US Federal Reserve and several other major central banks announced a coordinated effort to boost the flow of US dollars through the global financial system to help keep credit moving.
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements,” the central banks said in a joint statement.
The move comes after a week of volatility that started with the collapse of two US banks — Silicon Valley Bank and Signature Bank (SBNY) — earlier this month.
However, UBS CEO Ralph Hamers said there were still many details to be worked through, according to Reuters.
"I know that there must be still questions that we have not been able to answer," he said. "And I understand that and I even want to apologise for it."
Brian Jacobsen, senior investment strategist at Allspring Global Investments, told Reuters: "Provided markets don’t sniff out other lingering problems, I’d think this should be pretty positive."
US and Asia
In early Asia trade, Tokyo’s Nikkei 225 (^N225) fell 1.42% to 26,945 points, while the Hang Seng (^HSI) in Hong Kong lost 3.18% to 18,897. In mainland China, the Shanghai Composite (000001.SS) also lost ground, falling 0.48% to 3,234 points.
US stocks gained some ground today after closing lower on Friday as banks remained under pressure after a consortium of 11 big US banks banded together to deposit $30bn into First Republic (FRC) in a bid to stabilise the banking system.
Richard Hunter, head of markets at Interactive Investor, said: “Markets are set for another bumpy ride this week, despite a couple of developments at the weekend designed to stem the tide of sellers among financial stocks.
“US markets ended last week on the back foot, with investors unwilling to take positions ahead of what could potentially be — and indeed was — an eventful weekend. In particular, the difference between difficulties at regional US banks and an established European name underlined the escalation of the situation and investors reacted accordingly.”
Meanwhile, the pound (GBPUSD=X) regained the upper hand against the US dollar on Monday, despite global banking sector concerns, up 0.22% to $1.22.
Against the euro, Sterling (GBPEUR=X) also rose by 0.17% to €1.14.
Traders will now be waiting for the interest rate decisions by the Federal Reserve, Swiss National Bank, and the Bank of England this week.
“As the effects of interest rate hikes conducted so far become more apparent, we believe markets will increasingly start to price in interest rate cuts over the next one to two years,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.
“That will make attractive fixed-rate returns on cash and fixed income assets harder to come by in the future. We recommend investors lock in current high yields and manage timing risk by doing so progressively.”
Oil prices started the week at a loss on global banking sector concerns with Brent crude futures (BZ=F) falling $2.32, or 3.2%, to $70.65 a barrel. Last week, Brent fell nearly 12% — its biggest weekly decline since December.
US West Texas Intermediate crude (CL=F) was also down, by $2.15, or 3.2%, to $64.59 a barrel — also its lowest price since December 2021.