Credit Suisse Group (CS) announced that it immediately would start drawing on a line of credit of $53.7 billion that was granted by the Swiss National Bank. This lifeline has relieved some immediate concerns about Credit Suisse, but the stock is trading up just a few cents in the premarket. Some sort of bailout was anticipated Wednesday afternoon, so the news already has been well-discounted. The problems at CS are not fixed by any means, but the bank now has time to find longer-term solutions.
Futures are mixed on the news as traders consider the European Central Bank interest rate decision. The ECB originally planned to hike rates by 50 basis points, but it now faces the same dilemma as the Federal Reserve and must balance the problems in the banking sector against the repercussions of being less aggressive in the battle against inflation.
Due to the issues in the banking sector, there has been a sharp transition from worries about inflation to worries about slowing growth that will be accelerated by banking problems and tighter lending standards.
The market has reacted to this shift by dumping financials and rotating into technology names, but the bears continue to warn that those stocks will be hit by valuation adjustments as the economy slows. Once again, the bulls are focused on short-term price action and still appear to have high levels of liquidity. A big part of that liquidity is coming out of the financial sector and it won't be a driving force for long.
The reaction to the ECB interest rate decision should provide insight into the market's mood regarding the balance between hawkishness and dealing with the financial issues that arose so quickly. There has been a dramatic shift in fed funds futures, but this has not caused the same euphoric response that was produced by previous hints that the Fed would make a dovish pivot.
The big shift in the market at this point is that lower interest rates now are feared as an indication of a weak economy. Bad news actually may be bad news now rather than good news because it is anti-inflationary.
Oil continues to be under strong pressure, which is further confirmation that market concerns are shifting from inflation worries to recession worries. The reopening in China helped to boost oil and other commodities for a while, but that has now fizzled.
The primary question for traders today is whether there will continue to be a strong rotation into technology names and out of banking, oil and small-caps. Small-caps have been significantly lagging lately, which is due not only to pressure on small banks but also a drop in speculative trading.
The market action is mixed in the early going, but we will see fast movement on the ECB decision.
