European markets initially opened sharply lower today as investors assessed the fall-out of the weekend deal that saw UBS acquire Credit Suisse for the knockdown price of just over $3bn.
The deal has generated some blowback from AT1 bondholders aggrieved that they are being wiped out while shareholders get a price of CHF 0.75 a share.
Europe
The FTSE100 slipped to its lowest level since 4th November, before seeing a solid recovery off those lows, undergoing an in excess 2% trough to peak swing in the process, pushing back above the 7,400 level at the time of writing, as the volatility of the last few days continues.
We’ve also seen a decent rebound from the likes of the DAX and CAC 40 as well, with banks also helping to drive the recovery off the lows after initially opening lower.
The action by Swiss authorities in bailing in these bondholders to bolster the core capital position of the new bigger bank has raised questions about the rest of the AT1 market, and which initially saw some weakness across the rest of the European banking market, as AT1 valuations got reassessed.
While one can sympathise with the bondholders over today’s course of action, if they’d bothered to read the prospectus for these bonds, they would have realised that being bailed in was a very real risk in the event of possible insolvency, and that the normal pecking order might not be followed. The fact that they didn’t suggest they really should have read the small print a little more closely, a clear case of caveat emptor if ever there was one.
It also rather misses the point that even if shareholders had been wiped out, the bondholders would still have been bailed in anyway, which suggests their outrage is more directed at the fact that shareholders received anything at all, than the fact that they weren’t treated the same.
UBS shares initially plunged on the open, falling 16%-to-six-month lows, before rebounding into positive territory by lunchtime, as investors weighed up the pros and cons around the deal, and decided on balance, that it probably is a good deal in the long term.
The rebound in the UBS share price also helped to pull European markets off their lows of the day, and into positive territory as markets started to price in the prospect of a central bank pause in rate hikes this week, with 2-year yields in the US, UK, and Germany seeing significant swings in their yields.
The reiteration by the ECB and the Bank of England of the bail-in pecking order of bank insolvency, or bankruptcy has also helped to assuage some nervousness around the AT1 market, however, today’s events are still a reminder that just because you are higher up the pecking order when it comes to being bailed in, it doesn’t mean you won’t still get wiped out.
Despite the recovery in the UBS share price, banking shares have still underperformed relative to the rest of the market as investors look more closely at the rest of the sector, and any potential exposure to the AT1 market.
The main underperformers have been the likes of Standard Chartered and Barclays, while the underperformance of the Nasdaq 100 is weighing on Scottish Mortgage Investment Trust.
On the broader market, the rebound is being driven by basic resources, helped by strong gains in copper prices, helping to push the likes of Glencore, Antofagasta, and Anglo-American higher.
US
US markets initially saw a mixed open with the Dow and S&P500 pushing higher, while the Nasdaq 100 has underperformed as markets price in the prospect that we might be closer to the end of the current crisis of confidence.
This is no better illustrated than in further share price weakness in First Republic Bank, however, other US regional banks have pushed higher with New York Community Bancorp rallying as much as 40% on the open, after it took on some of Signature Bank’s deposits and some of its loans.
The banking sector has helped drive the recovery in the US with Goldman Sachs, American Express and JPMorgan Chase all pushing higher.
There are more job losses being announced at Amazon after the company announced another 9,000 jobs were to go in addition to the 18,000 job cuts that were announced earlier this year.
FX
The US dollar has slipped back on the basis that we might start to see the Federal Reserve shift its position when it comes to how many rate rises might be on the way this week. With the recent sharp slide in US 2-year yields markets appear to be pricing in the prospect that the Fed is done when it comes to raising rates, as all the hawkishness of the last two weeks gets priced out of the bond curve.
In the last 2 weeks, we’ve fallen from 5% to below 4% today with the best performers coming from the likes of the pound, as well as the Canadian dollar and the euro, all of which have lagged the Fed when it comes to rate hike expectations.
Commodities
Amidst all the turmoil on stock markets in the last week or so, crude oil prices have continued to come under pressure over concerns about the economic outlook, as several banks downgrade their growth outlook for Europe and the UK on concerns over tighter financial conditions. Brent crude prices hit their lowest levels since December 2021, finding support just above $70 a barrel, at its 200-week SMA.
UK natural gas prices have also continued their recent declines, falling to their lowest levels since December 2021, and below 100p a therm.
Gold prices briefly popped above $2,000 an ounce in early trading today, before slipping back as stock markets pulled off their lows of the day.
Volatility
Banking stocks remained in focus heading into the weekend break, but elevated levels of price action were also seen across some heavyweight energy stocks. Oil prices have been tumbling, something that has served to increase volatility for some of the biggest players. Shell saw a one-day print of 75.63% against 39.78% on the month, whilst BP recorded 81.42% on the day and 44.32% on the month.
Leading on from that, crude oil proved to be the most active of commodities for the session. One day vol on Brent Crude came in at 58.48% against 38.5% for the month, whilst the uptick in the US WTI contract wasn’t far behind either, with prints of 59.78% and 40.58% respectively.
CMC’s proprietary basket of cannabis stocks was driven notably last week both by gains for the heavily weighted Tilray, plus optimistic noises from the US Treasury over freeing up mainstream banking access for the sector. However, the upside proved difficult to sustain running into the weekend break with the underlying falling more than 2.5%. One day vol came in at 79.63% against 58.72% on the month.
Activity in crypto assets remains elevated but is ebbing away from recent highs. Bitcoin, which finished the week at nine-month highs and continued to gain ground in weekend trade printed one day vol of 66.49% against 53.63%.
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