Mar 20, 2023
The Daily Chase: UBS to buy Credit Suisse for US$3.2B; Market volatility continues
Contagion Risks Remain After UBS-Credit Suisse Deal, AMP Says
The Credit Suisse crisis finally has something of a conclusion after UBS Group agreed over the weekend to buy its long-time Swiss rival for US$3.2 billion after a crisis of confidence rocked Credit Suisse. It’s the first mega-deal between two systemically important banks – think the “too big to fail” cohort – since the turmoil of 2008, and it came together quickly, essentially a shotgun marriage engineered by Swiss authorities. That urgency was prompted by an increasingly dire outlook for Credit Suisse, and concerns of contagion risk – the bank was facing accelerating consumer outflows over the last week, as concerns grew over the strength of individual financial institutions in the wake of the blow-up of Silicon Valley Bank. Obviously, UBS isn’t doing this out of charity, and is receiving some significant support from the authorities that urged it to make a deal – the Swiss National Bank is offering 100 billion Swiss Francs worth of liquidity assistance to UBS as part of the deal, while the Swiss government is granting a nine-billion franc guarantee against potential losses on the assets UBS is taking over.
…BUT THE SALE FAILS TO SOOTHE MARKET JITTERS
A lot to unpack here, but it doesn’t seem like everything is coming up roses on the markets in the wake of the deal. European markets were markedly lower in earlier trading, though have since recovered much of those losses, while U.S. futures have been oscillating to start the week. It appears investors are trying to figure out just what to make of the deal, in terms of balancing some stability against those broader concerns about what it says about the structural integrity of the financial system. Further to that, safe haven assets have been rallying – U.S. treasuries are up across the board and gold’s topped US$2,000 an ounce for the first time in a year. On the flip side to that is the fears that this turmoil could stymie economic growth, which has sent U.S. West Texas Intermediate prices to US$65 a barrel amid a somewhat risk-off trade.
CENTRAL BANKERS COORDINATE ON LIQUIDITY MEASURES
And amid all this, a cabal of central banks announced over the weekend that they would undertake coordinated action to ensure market liquidity was at no risk of drying up due to the turmoil. The Bank of Canada is joining the U.S. Fed, Bank of England, ECB, SNB and the Bank of Japan to increase the frequency of their U.S. dollar auctions to daily from weekly in a bid to reduce potential strains on global markets. Now, this is into the plumbing of how financial markets work, so it gets a bit wonky, but the crux of the matter is that by switching to a daily auction, those central banks make sure greenbacks are more readily at hand for any funding needs that arise, rather than having to wait a full week – keeps things nimble as situations evolve quickly.
OTHER NOTABLE STORIES
- Deputy Prime Minister and Finance Minister Chrystia Freeland is poised to discuss the state of the Canadian economy and the federal government’s priorities for next week’s budget at a speech early this afternoon in Oshawa.
- Shares of First Republic Bank are plunging once again – down about 20 per cent in the premarket – after ratings agency S&P Global once again cut its view of the bank, warning that US$30 billion rescue deal has not resolved the bank’s challenges.
- Chinese President Xi Jinping is in Moscow for talks with Vladimir Putin on a range of topics, including Beijing’s suggestions as to how to bring the war in Ukraine to an end.
- Notable earnings: Foot Locker, Resolute Forest Products
- Deputy Prime Minister Chrystia Freeland will deliver an address about the Canadian economy and priorities heading into budget 2023 in Oshawa (1330, media avail to follow)