By now, most of you have probably seen the headlines. Swiss banking giant UBS Group AG (UBS) has agreed to acquire its long time rival Credit Suisse (CS) for a rough CHF 3B or around $3.25B US. I believe this puts the deal at about $0.76 per ordinary (European) share. The American Depositary Shares closed at $2.01 on Friday. As pointed out by the Wall Street Journal, this will be the first meagamerger of systemically important global banking institutions since the 2008 financial crisis.
Investors in the equity will get hurt, but will not be the only big losers here, as Credit Suisse went out on Friday with a market cap between $7B and $8B. Readers can see the current valuation ($3.25B) above. The "Additional Tier 1" or ATI Credit Suisse bonds were a point of contention before the deal was finalized. The value of these bonds is essentially wiped out as they ran with a total par value of $17B and UBS would not have been able to make this deal work without the elimination of that obligation. These bonds are now worthless.
The Swiss National Bank, over the weekend, had agreed to offer a roughly $100B line of liquidity to UBS as part of the negotiations necessary in getting this deal done. Additionally, the Swiss government has agreed to provide UBS with a greater than $9B backstop in order to offset potential losses that UBS may suffer as the purchaser.
There was something of a rush in order to get this done ahead of the reopening of Asian markets on Monday morning. This seems eerily similar to what I wrote something last week in regards to the Federal Reserve Bank in the US rushing to publish its two press releases ahead of last Sunday's reopening in Asia. That was in the wake of failures at both Silicon Valley Bank (SIVB) and Signature Bank (SBNY) .
According to the Financial Times, the two sides had been in discussions since last Wednesday as the $54B credit line offered by the Swiss National Bank to Credit Suisse did little to slow down the global loss in confidence in that bank. The Wall Street Journal reports that Credit Suisse faced as much as $10B in customer outflows a day last week.
Sadly, the demise of Credit Suisse comes just months after the Saudi National Bank and the Qatar Investment Authority had invested in the bank to the extent that the two own a rough 17% of Credit Suisse in aggregate and were the bank's two largest shareholders.
This deal also puts the "First Boston" investment banking spin-off in jeopardy as UBS Chairman Colm Kelleher spoke of shrinking Credit Suisse's investment banking unit and aligning Credit Suisse's more aggressive culture with UBS's more conservative style.
Central Banks Move to Ease Dollar Funding
The Federal Reserve Bank along with the European Central Bank, The Bank of England, the Swiss National Bank, the Bank of Canada, and the Bank of Japan took coordinated measures on Sunday to improve dollar liquidity in US dollar swap arrangements.
In a joint statement, these central banks agreed to move their weekly auction of US dollars to a daily schedule. These daily dollar auctions across time zones came after the announced merger between UBS and Credit Suisse and ease of access to US dollar funding is something that central bankers have coordinated globally as recently as 2020 during the pandemic-related shutdowns.
Elsewhere, The Federal Reserve and US Treasury Department released a joint statement that welcomes the rescue of Credit Suisse, while adding that US banks were both strong and resilient.
What About...
...First Republic Bank (FRC) ? This is what US eyes will be on come Monday morning. The bank's stock had been down more than 80% in March, closing at $23.03 on Friday, which was an 11% drop for that day alone. I see the shares trading down another 24% overnight, trading with a $17 handle. This is despite the $30B in new deposits placed in the bank by 11 of its rivals - including the nation's largest banks - just to buy some time for First Republic and avoid the potential for a systemic event.
To put that $30B deposit in perspective, customers of First Republic have withdrawn a rough $70B in deposits from the bank, which comes to almost 40% of it's total from just a few weeks ago. Making matters worse, also on Sunday, S&P Global Ratings cut First Republic's credit rating for the second time in a week, this time to B-plus from BB-plus (further into "junk" territory), while warning that another downgrade was still possible.
My Thoughts...
What does the Fed do this Wednesday afternoon? Do they commit to keep on fighting inflation? Do they choose to fight inflation, or to try to prevent some kind of economic catastrophe? Likely, the US central bank must choose one over the other. The problem there could be the Fed's dual mandate itself. In theory, with employment already theoretically full, all the Fed has to do is focus on price stability.
Some have talked about adding a third mandate. Forget about what those folks have talked about for now. Perhaps a third mandate would and should be to prioritize financial stability when conditions appear to put the two prongs of the current dual mandate in conflict with each other.
That said, this week... the bond market may take away what control the Fed still had in whether to tighten or ease monetary conditions away from the central bank. The slope of the curve is already screaming a "recession" of undeterminable depth and tighter, perhaps much tighter financial conditions are on the way regardless of what the Fed does with their projections and with the short end of that curve.
Investors had reacted on Sunday night very positively to the news out of Switzerland. As the hours have passed, that has changed. European equities have weakened, US equity index futures were trading lower, and capital is flowing into Treasuries once again.
What about Inflation? It is a problem. A sharp reduction in economic activity as lending slows, however... will certainly do more to combat inflation than anything the Fed can do as far as raising rates goes. The smartest thing the Fed can do right now is to pause almost everything they are doing through ritual. Pause the rate hikes. Pause "quantitative tightening" as last week, the Fed's balance sheet ballooned anyway.
This will be politically difficult as some members of the FOMC may see a rate hike this Wednesday as a matter of credibility. Credibility comes from doing what is necessary when it is necessary. Pause all of it and allow the work already done to catch up while facing a banking crisis both domestically and globally. To do otherwise would be reckless. But heck... reckless is what we have been all along, from Congress to the central bank to the regulatory side of all of this, isn't it? Folks actually thought all of that pandemic money was free and the politicians fed into the whole concept.
The Week Past
Wild is the only word that comes to mind. Wild might not be sufficient in describing what this way cometh. From Silicon Valley Bank to Signature Bank to Credit Suisse to First Republic Bank, the week was one huge banking mess as the nightmarish realities of being unable to drive net interest margin with the yield curve as inverted as it has been, forced depositors to look for smarter ways to "invest" their cash savings.
This and some amateurish bond portfolio composition at least at Silicon Valley Bank forced something of a run on regional US banks and inflows into the larger, money-center banks that are perceived as safer places to be. Are they? Hope so. That is if one does not already have much of those savings in T-Bills. Those are safe, right?
As far as the macro last week is concerned, we experienced a February print for consumer prices that showed some disinflationary action, but not to the degree hoped for. The very next day, however... February PPI hit the tape in a state of deep freeze. I mean that wholesale and producer prices for February were ice cold. Elsewhere, February Retail Sales, Industrial Production, and Capacity Utilization painted a picture that quite possibly already puts the US economy in a state of recession.
Regional manufacturing surveys out of both the New York and Philadelphia Federal Reserve districts were simply disastrous. On top of that, the University of Michigan's mid-March consumer sentiment survey showed some deterioration after having shown improvement for two consecutive months. At least inflation expectations are running at their lowest levels in almost two years.
Earnings
We are now in the "dead zone" in between Q4 2022 and Q1 2023 earnings seasons. According to FactSet, with more than three weeks still until the reporting begins, the current quarter (Q1) is seen at earnings growth of -6.1% (same as one week ago) on revenue growth of 1.9%, down from 2.0% last week. Q2 2023 is seen at earnings growth of -3.8% on revenue growth of less than 0.1%.
For the full calendar year of 2023, consensus view is now for earnings growth of 1.9% (unchanged) on revenue growth of 2.1% (also unchanged). The full year numbers for profitability finally stopped moving lower last week, while the expectations for revenue growth also held their ground. This was the first week in several that the numbers finally did not imply further margin contraction beyond what has already been priced in.
Marketplace
Equity markets ended last week mixed after suffering through a brutal day on Friday. Trading volumes were elevated all week, culminating with a significant (and negative) pop on Friday due to the quarterly triple witching expiration event. Sunday news had put a bid under equity index futures here in the States that dissipated just before midnight, and then found some support over the 90 minutes in between 02:00 and 03:30 in New York.
As for last week, the trading volume did seem higher on "down" days than on up days, as there was a clear rotation out of cyclicals, transports and smaller caps (stocks that suffer the worst during a recession) and into growth and defensive types (stocks that either do well in a lower interest rate environment or that can defend themselves with steady cash flows).
Readers will see that the technical damage to the Nasdaq Composite that was apparent one week ago has reversed significantly. The index has taken back its own 200 day SMA (simple moving average), as well as its 21 day EMA (exponential moving average) and 50 day SMA. The Nasdaq Composite also experienced a golden cross (bullish crossover of the 200 day SMA by the 50 day SMA) mid-week. These are positives, at least for Nasdaq type names despite the tough to look at news flow.
The S&P 500 may have gained some small ground over the past five trading days, but readers will see below that this index has not made anything close to the technical progress one sees in the chart above. The S&P 500 did briefly take back its 200 day SMA last week only to hit resistance and then fail on consecutive days at the 21 day EMA. Note the increased trading volumes since March 8th or so. Still, that trading volume has been greater on "down" days than on "up" days.
For the past five trading days, the S&P 500 gained 1.43%, after having surrendered 1.1% on Friday. The S&P 500 closed Friday up 2.01% year to date. The Nasdaq Composite rambled on to a gain of 4.41% for the week after surrendering 0.74% on Friday. This left the index up 11.12% for 2023. The Philadelphia Semiconductor Index has been a relative outperformer and a strength within the Nasdaq Composite. This index, which readers know is something that I always watch closely, gave up 0.47% on Friday, but gained a robust 5.46% for the week. This index now stands up 21.78% for 2023.
This leaves us with the Russell 2000. The "small cap" index got pasted again last week as many regional banks do call this index home. The Russell gave up 2.56% on Friday and 2.64% for the week on top of a loss of 8.07% for the week prior. The Russell ended last week down 2.01% year to date.
I mentioned the KBW Bank Index last week in this weekly piece, and it certainly is still quite relevant. The KBW Bank Index took the worst beating of all of the mid-major to major equity indexes once again last week. This index gave up 5.25% on Friday and 14.56% for the week on top of a 15.74% loss for the week prior. The KBW Bank Index is now down 21.86% for 2023.
All 11 S&P sector-select SPDR ETFs shaded red on Friday, but only four did so for the week on the whole. Technology (XLK) and Communication Services (XLC) , as you likely expected, led the winners with gains of 5.66% and 5.26%, respectively. The Financials (XLF) surrendered 5.92% for the week for obvious reasons, while Energy (XLE) finished at the bottom of the weekly performance tables (-6.85%) as investors prepare for recession.
According to FactSet, the S&P 500 now trades at 17.1 times forward looking earnings, which is down from17.2 times a week ago. This ratio remains well below the S&P 500's five year average of 18.5 times, and for a second straight week, remains below its ten year average of 17.3 times.
To Our Front
Here we go again. Now we have to see how Wall Street receives this UBS/Credit Suisse news. The fact that the Fed had to make dollar funding easier on a global basis once again and the ongoing saga of the regional banks in the US are not good news, but it is good that the Fed has taken this step. Then among the macro, which is a bit light this week, we have an FOMC policy decision on Wednesday afternoon, and this one comes complete with (almost certainly inaccurate) quarterly economic projections.
As far as the macro is concerned... Tuesday brings us February Existing Home Sales, and then the Fed policy decisions the next day. On Thursday, we'll see February New Home Sales and then on Friday we do have a big day. On Friday, the Census Bureau will hit us with February Durable Goods Orders (including Core Capital Goods) along with the S&P Global Flash PMIs for both the US manufacturing and services sectors.
As mentioned above, we are now in between earnings seasons. This week will again be light on the earnings front. That said, there will still be a few names reporting that are noteworthy. On Monday morning, we'll hear from Foot Locker (FL) , followed by GameStop (GME) and Nike (NKE) on Tuesday afternoon. Wednesday brings numbers from Ollie's (OLLI) and Chewy (CHWY) , while Darden Restaurants (DRI) and General Mills (GIS) report on Thursday.
Tech investors should be cognizant of Nvidia's (NVDA) highly anticipated GTC event this week. The four day event that starts on Monday and runs through Thursday will focus on all of the cutting edge technologies that the firm is working on, which means that there will be quite a lot said on artificial intelligence. CEO Jensen Huang delivers the keynote address on Tuesday at 08:00 PT.
Economics (All Times Eastern)
No significant domestic macroeconomic data schedules for release.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: FL (.50), (LAC) (-.34)
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