Stock Market

Credit Suisse rescue lifts sentiment, focus remains on Fed and US banks

Investors received a boost on Tuesday with the announcement that Credit Suisse had been rescued by its Swiss competitor, UBS. However, concerns lingered about the potential damage the crisis may cause to the credit markets and smaller US banks. The US Federal Reserve meeting this week is of particular interest, with traders curious to know if the central bank will end its rate hikes that some blame for causing the crisis. The $3.2 billion deal for Credit Suisse has quelled the worst fears of systemic contagion in the financial system, with Asian shares lifting off their lows as a result. While the situation in US regional banks and Credit Suisse has raised concerns about contagion risk, major central banks have been reacting swiftly to backstop liquidity. Investors are cautioned that near-term sentiment will remain volatile.

Credit Suisse kicked off its annual Asian Investment Conference in Hong Kong on Tuesday, although CEO Ulrich Koerner, who was expected to attend, dropped out and the event was closed to the media. The collapse of US mid-sized lenders Silicon Valley Bank and Signature Bank triggered the demise of Credit Suisse, and although European bank shares rebounded from recent losses, investors still fear there may be other ticking bombs in the banking system. Shares in First Republic Bank halved on Monday, raising concerns that last week’s $30 billion infusion of capital would not be enough. JPMorgan Chase is leading talks with other big banks on new efforts to stabilise First Republic with a possible investment into the lender. Wall Street’s S&P 500 banks index recovered 0.6%, and other regional US lenders rose.

Policymakers from Washington to Europe have repeatedly stressed that the current turmoil is different from the global financial crisis 15 years ago, pointing to banks being better capitalised and funds more easily available. Still, top central banks have promised to provide dollar liquidity to stabilise the financial system to prevent the banking jitters from snowballing into a bigger crisis. In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in a co-ordinated action to enhance market liquidity.

Investor focus in Europe shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and UK banking supervisors to try to stop a rout in the market for convertible bank bonds. Lawyers are talking to a number of AT1 bondholders about possible legal action. The deal will make UBS Switzerland’s only global bank. It will also make the Swiss economy more dependent on a single lender, prompting sharp criticisms from the country’s two biggest political parties.

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