Evening Brief – 03.15.23
In what remains an extremely fluid development, Credit Suisse Group AG’s shares plumbed historic lows Wednesday, dropping by as much as 30% at one point, which comes in the wake of restructuring issues, delays in submitting its annual report due to ‘material weakness’ flagged by the SEC last week and a broader industry selloff following the collapse of Silicon Valley Bank.
In addition to these challenges, the Swiss bank now faces a new problem: its top shareholder, Saudi National Bank (owns a 9.9% stake), said it will not invest any further due to the sharp decline in valuation.
It’s the last message you want to send during a time where markets are already jittery following recent bank runs and shutdowns. The 1-year Credit Suisse Credit Default Swaps (CDS) are blowing out, now trading 17% upfront as counterparty hedge flows soar. This is an implied spread around 2700bps, or about a 30% probability of default. Meanwhile, five-year CDS have widened the most on record.
The entire curve expectations for the European Central Bank have collapsed with the market now pricing in only 75bps of hikes by the end of the year. And even more notable, Federal Reserve rate hike expectations have plunged, now only a coin-toss between 0 and 25bps next week, and September pricing in 60bps of cuts.
We need to accept that some banks will come under pressure at this stage of the interest rate cycle. The Fed has hiked from zero to almost 5%. Moreover, starting from zero rates means a bigger rate sensitivity to hikes (think duration).
Even if the Fed hike rates by 25bps next week listen to the language. The odds are high it will hint at a pause given the financial climate.