Macro: Sandcastle economics
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Summary: The futures are indicating a positive open on Monday after UBS agreed to buy Credit Suisse for $3.25 billion in a government-brokered deal, while the Fed and five global banks move to boost US dollar funding and markets anticipate signals of a potential Fed pivot being signalled this week. The PBOC cut the reserve requirement ratio, European equities remain on tender hooks after an ECB hike, Gold equites surge, oil stabilises and wheat rallies.
The futures are indicating a positive open on Monday after UBS agreed to buy Credit Suisse for $3.25 billion in a government-brokered deal that is aimed at containing the spreading confidence crisis.
Last week, at a benchmark indices level, we saw the strength of the information technology sector play out in markets and offset the bank sector losses. Mega-cap tech stocks have been somewhat looked at as safe haven play; as a testament to their cash flow strength and customer books. Alphabet (GOOGL:xnas) rose 12.1% last week, leading big caps higher, with Microsoft (MSFT:xnas) up 12.4%, Amazon (AMZN:xnas) rose 9.1%, Meta (META:xnas) gained 9.0%, and Apple (AAPL:xnas) rose 4.4% over the week. These moves supported the S&P 500 closing 1.4% closing last week, despite falling 1.1% on Friday, while the Nasdaq 100 gained 4.4% on the week, despite losing 0.7% on Friday.
Inversely, regional banks shares continued to slide on the week and on Friday; the SPDR S&P Regional Banking ETF (KRE:arcx) losing 6% on the last day of the week, and losing 14.3% in total over the week, the broader KBW Bank Index also fell over 14% over five trading days.
Hedge funds’ short-selling shifted from banks, that have large held-to-maturity securities portfolios, to banks that are most exposed to commercial real estate loans. And after the Fed rolled out measures to backstop held-to-maturity security portfolios, the focus moved to banks with loan portfolios that tend suffer in a recession or credit contraction.
Sentiment is bound to remain very fragile this week, with investors likely to continue to worry about the economic impact of aggressive monetary policy tightening by the ECB last week, despite some European banks being in turmoil. Switzerland’s biggest bank, UBS agreed to takeover Credit Suisse for 3 billion Swiss Francs ($3.2 billion), in a government brokered deal. The price for bank is about a fraction of Credit Suisse’s closing price on Friday. The Swiss government is granting a 9 billion franc guarantee in liquidity assistance to UBS, to backstop certain losses, while the Swiss National Bank is offering UBS 100 billion-franc liquidity assistance.
EU stocks rounded off last week in a turbulent fashion, ending lower on Friday, despite announcements Credit Suisse and First Republic Bank would receive financial help to prevent a banking sector crisis. The pan-European Stoxx 50 index shed 1.26% on Friday, taking its weekly loss to 3.9%, which is the worst weekly loss in a year.
Treasuries continued to catch a safe-haven bid on Friday amid unsettled anxiety about the potential spill-over effect from the fall into receivership of the 16th and 30th largest banks by assets in the US last week. The saga across the pond surrounding the second-largest bank in Switzerland added to the risk-off sentiment. Yields on the 2-year plummeted 32bps on Friday and a dramatic 75bps over the week to 3.84%, as investors poured money into the front end for safety and traders betting for the Fed to cut policy rates aggressively in the coming months, with some anticipating a cut as soon as at the FOMC this week. Yields on the 10-year dropped 15bps on Friday and 27bps for the week to 3.43%. The 2-10-year yield curve steepened to -41bps from -89bps over the week as the Fed may not be able to deliver the inflation-fighting pledge that it has previously made.
Hang Seng Index closed higher by 1.6% on Friday and edged up 1% over the week as sentiment stabilized somewhat after the U.S. and Swiss regulators rolled out measures to support banks under pressure. Technology stocks outperformed, the Hang Seng TECH Index surging 4.4% on Friday, bringing the weekly gain to 5.2%. Baidu (09888:xhkg), Kinsoft (03888:xhkg), Bilibili (09626:xhkg), and Sensetime (00020:xhkg) soared over 10%, driving the technology space higher. Despite initially being considered underwhelming, subsequent comments from analysts on Baidu’s BERNIE AI chatbot launch turned more positive.
Li Ning (02331:xhkg) plummeted 9.9% on Friday after reporting weaker gross margins due to larger retail discounts and a shift in channel mix from retail to wholesale, as well as higher inventories. The disappointment in the Chinese sportswear leader somewhat raised concerns about the much-anticipated pent-up demand for consumer goods in China. Investors will monitor closing the results from Tencent (00700:xhkg), Meituan (03690:xhkg), and Pinduoduo (PDD:xnas) next week.
In A-shares, CSI 300 oscillated in lackluster trading and closed nearly flat for the week after bouncing modestly by 0.5% on Friday. Computing, ChatGPT concept, communication, media, semiconductor, and energy gained as food and beverage lagged.
After the mainland and Hong Kong markets closed. the People’s Bank of China announced a 25bp cut to the reserve requirement ratio (RRR). Market reactions to the cut were limited as Hang Seng Index futures tumbled 1.7% overnight in tandem with the decline in the U.S. and European stock markets.
The Aussie share market opened 0.3% lower, following on from Wall Street’s losses on Friday. However gold equities are charging with Newcrest rising over 6%, Regis Resources is about 8%, Evolution is up 9%, along with Northern Star, while Gold Road leads, up 10%. It comes as gold rallied almost 4% on Friday to $1,989.25 an ounce, its highest close since March 2022. Meanwhile, the Australian 10-year breakeven inflation rate fell 5bps to 2.2% on Monday, seeing regional banks such as Suncorp slide, along with insurers such as Insurance Australia.
The US dollar held up on Friday after a roller coaster week loaded with banking turmoil, abrupt shift in central bank expectations and massive moves in yields. JPY was the biggest beneficiary on safe haven flows, and a strong wage growth just adds impetus by keeping the BOJ pivot possibility alive. USDJPY was looking at a break below 131.50 but recovered to 132.50 on reports of a deal on UBS buying Credit Suisse. AUDUSD jumped above 0.67 while NZDUSD touched 0.63. EURUSD remains a key focus this week as it closes in on 1.07 with the Credit Suisse situation still playing out, and the impact on AT1 bonds may likely start a more pronounced weakening of EUR. GBPUSD rose above 1.22. USDCHF also still hovering below 0.93 as the Credit Suisse risks crowded out the safe haven bid to the franc in comparison to the yen and gold.
Crude oil prices fell sharply last week as the fears of a banking crisis weighed heavily on sentiment and sent shock waves about the economic backdrop as downside risks to growth accelerated. WTI prices found support at $66/barrel while Brent was supported at $72. Most of the sell-off was however driven by technicals, and OPEC+ delegates are reportedly still encouraged by the strength of the Asian demand. While banking sector concerns will remain key in the week ahead, event risks from FOMC meeting along with a slew of other central banks decisions including PBoC, BOE and SNB will mean that oil price moves remain a function of broader market sentiment.
Gold hit a one-year high on Friday to $1990 as investors sought safety in haven assets amid the banking crisis concerns. Expectations that the Fed will ease up on its aggressive rate hike cycle have also picked up, with the market now pricing in multiple rate cuts by the end of the year, which is usually a trigger for gains in gold. However, some potentially short-term relief was seen in the markets on the announcement of UBS-Credit Suisse deal overnight which could mean some consolidation in gold, but the rally appears to have more legs with ETF buying also picking up. Gold closed last week with over 6% gains, while silver was up 10%.
Wheat prices rose 4.6% last week despite the Black Sea agreement being extended, as uncertainties continue to loom large. Russia earlier agreed to extend the deal only by 60 days after it ended on Saturday, but Ukraine is pushing for 120 days. Further headlines will be on watch today and both wheat and corn prices could remain dependent on that, with Corn also seeing increased demand.
In a coordinated effort, the Federal Reserve and five other central banks, changed their US dollar swap arrangements, in a bid to create more liquidity to ease growing strains in the global financial system. The Fed, along with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank on Sunday banks changed their 7-day dollar swap maturity operations, from weekly to daily. This simply means their settlement will move from weekly to daily, to ensure there is more flowing capital in the system. The operational change will begin on Monday March 20 and continue until at least the end of April.
The Fed has made changes like this in the past when the availability of US dollars shrinks. And it has of late, with some global banks rushing to shore up liquidity, and thus borrow cash from the Fed, as some banks were worried deposits would dwindle. Lenders borrowed $165 billion. Also consider, separately, that emergency lending by the Fed, reversed several months’ worth of Fed efforts to shrink its balance sheet.
The largest bank in Switzerland, UBS agreed to pay 3 billion Swiss Francs (over $3.2 billion) or 0.75 francs a share to takeover Credit Suisse, the second largest Swiss bank. The price offered is a 60% discount to Credit Suisse’s closing price of 1.86 francs on Friday. UBS initially rejected the offer of 1 billion francs and later finally agreed to a deal at 3 billion francs. The Swiss government is providing more than $9 billion to backstop certain losses and the Swiss National Bank is providing UBS over $100 billion of liquidity to complete the deal. The deal will completely wipe out around $17.3 billion Alternative Tier-1 or contingent convertible bonds which are also known as CoCo bonds.
The People’s Bank of China (PBOC) announced on Friday, after the market close, that the central bank is cutting the reserve requirement ratio (RRR) by 25 basis points for all banks that are currently subject to a RRR above 5%, bringing the weighted average of RRR across banks to 7.6%. The move is estimated to release between RMB500 and RMB550 billion in loanable funds into the banking system.
The 25bp cut in RRR is relatively modest as the norm before 2022 was 50bps to 100bps and as large as 300bps in April 2019. Nonetheless, it is in line with the more moderate moves in 2022. All eyes are now at the 1-year and 5-year loan prime rate fixing today.
The regulator oversight of China’s financial sector and technology sector is undergoing institutional reform, moving some key authorities from the State Council to newly set-up committees under the direct supervision of the Communist Party of China. The function of the oversight of financial stability and development is centralized at the newly set-up Central Financial Committee of the Communist Party of China (the CCP) while the State Council’s Financial Stability and Development Committee and related administrative entities will be abolished. A Central Financing Working Committee under the CCP will be established to strengthen the party-building and political oversight of the financial sector.
The CCP will establish a Central Technology Committee to centralize the oversight of the planning and strategy-setting for technological development and advances in sciences, putting the State Council’s and related entities’ work in technology and science under the direct supervision of the CCP.
The CCP will also set up a Central Social Work Department to oversee social governance as well as party-building in private enterprises. A new Central Office for Hong Kong and Macao Works will be set up under the CCP to replace the Hong Kong and Macao Affairs Office under the State Council to oversee China’s governance over Hong Kong and Macao.
The Chinese Foreign Ministry has confirmed in a statement on its website that President Xi Jinping's much anticipated state visit to Russia will be held from March 20-22, marking the first such in-person visit with President Putin since the Ukraine war started in February 2022. It is being reported that the two leaders will discuss strategic cooperation, where as the world will be watching if President Xi makes an effort to mediate on the invasion of Ukraine. Meanwhile, the International Criminal Court (ICC) issued an arrest warrant for Russian President Putin, alleging forcible deportation of Ukrainian children is a war crime. The reaction to this accusation remains on watch and could create another geopolitical stir.
PDD (PDD:xnas) is scheduled to report Q4 results today. The holding company of Pinduoduo, an ecommerce platform in China, and Temu, an ecommerce platform in North America, is expected to see 53% Y/Y revenue growth due to increased merchant activity, with its adjusted net profit forecasted to rise 46% Y/Y.
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