The global banking system is experiencing renewed unease as Credit Suisse’s largest investor announced their inability to provide the Swiss bank with more financial assistance. While Credit Suisse’s CEO, Ulrich Koerner, reassured investors that the bank’s liquidity base remained strong and was well above all regulatory requirements, analysts remain concerned that this is the tip of the iceberg with more consolidation and pain to come. Bob Michele, JPMorgan Asset Management CIO and global head of fixed income, said, “you put your money into the highest quality assets that you can find.” Furthermore, the lagged impact of central bank tightening has caught up, and there is much speculation around whether the Federal Reserve and other central banks can keep interest rates rising enough to curb inflation.
As a result, the US Dollar has rallied on safe-haven buying, overshadowing the UK budget announcements made by Chancellor Jeremy Hunt. While Hunt’s measures to support productivity and investment without adding strain on public finances were designed to boost the pound, the risk-off themes seem to have ignored such positive implications for Sterling. The Chancellor says the UK economy is on the right track and the government’s plan for the economy is working.
Concerns about the Swiss bank also triggered a sharp decline in European and US bond yields, marking the biggest drop since the week of Black Monday on October 19, 1987. Two-year Treasury notes, which move in step with interest rate expectations, tumbled 98 basis points in the last five days. Markets are now pricing in an 80% chance of a 25 basis point Federal Reserve hike next week and a 50% chance of no change.
Furthermore, the December Fed funds futures, which reflect the overnight rate that banks use to lend to each other, have dropped to 3.62%. This indicates that the market expects the Fed to be cutting interest rates by the year’s end, if not before. While investors question whether central banks can keep hiking interest rates to curb inflation, the US Dollar has surged on the back of safe-haven buying, with the DXY, an index that measures the greenback vs. a basket of currencies, vaulting 104 the figure on a tear all the way to 105.103.
With Credit Suisse battling to recover from a string of scandals that have undermined investor and client confidence, the institution’s plunging stock price has re-ignited jitters among investors about the resilience of the global banking system following the collapse of Silicon Valley Bank last week. The doubts around Credit Suisse are causing a full-blown global banking crisis, with analysts predicting more consolidation and pain to come.
Bob Michele, JPMorgan Asset Management CIO and global head of fixed income, said that Credit Suisse shows the lagged impact of central bank tightening has caught up. Speaking on Bloomberg, Michele said that this is the tip of the iceberg, adding that investors should put their money into the highest quality assets that they can find. Michele also urged the Federal Reserve to pause, questioning whether central banks can keep hiking interest rates to curb inflation.
The uncertainty around Credit Suisse is already having a significant impact on bond yields, with the biggest drop since the week of Black Monday on October 19, 1987. This has rattled world markets, prompting significant concerns among investors about the banking crisis’s impact. While Credit Suisse’s CEO attempted to allay these fears, investors remain apprehensive about the fragility of the global banking system.
Investors’ worries largely stem from the lagged impact of central bank tightening, which has caught up with Credit Suisse. With concerns around the Swiss bank, European and US bond yields posted a sharp decline. Two-year Treasury notes tumbled 98 basis points over the last five days, the biggest drop in recent years.
Given the current climate of uncertainty, many investors are turning to safe-haven assets, including the US Dollar, which has risen in value in recent weeks. However, such trends could prove short-lived, particularly if the Federal Reserve and other central banks intervene to stabilise the global economy in light of the current banking crises. Only time will tell how these situations will unfold, but for now, investors will likely remain cautious in their investment strategies as global markets continue to respond to the Credit Suisse crisis.
