A look at the day ahead in the European and global markets by Wayne Cole
It’s been a quiet Monday so far with mixed Asian stock markets but US and European stock futures higher, perhaps because they weathered a weekend without another bank failing.
There is some relief that First Citizens BancShares Inc (FCNCA.O) is in advanced talks to acquire Silicon Valley Bank (SIVB.O). There was also talk that the Federal Reserve could expand its new bank lending program to reassure depositors.
Money is clearly flowing from smaller banks to their bigger siblings and to money market funds, which have seen inflows of more than $300 billion to a record $5.1 trillion over the past month. BofA notes that the two previous events like this were followed by Fed rate cuts in 2008 and 2020.
Fund futures now show an 88% chance of the Fed staying put in May, while pricing in a July cut at over 90%.
Small bank deposits fell $120 billion in the week ended March 15, while borrowing surged $253 billion, much of which is believed to have come from the Fed.
Capital Economics points out that deposits across all banks fell by $663 billion last year as customers seek higher yields.
“Unless banks are willing to raise their deposit rates to prevent this flight, they will eventually have to rein in the size of their loan portfolios, which, with the resulting pressure on economic activity, is another reason to expect a recession soon.” warn them .
European banks are facing similar strains, with the added speculative pressure on Deutsche Bank (DBKGn.DE) and a general increase in the cost of credit default swaps. Deutsche Bank’s five-year CDS hit 222 basis points on Friday, its highest since late 2018, while UBS’s CDS rose to 139 basis points.
Credit Suisse had to tap “a large billion amount” from the Swiss National Bank to secure its liquidity. Not only were customers withdrawing money, but counterparties were demanding guarantees to continue their trades, which is hardly an encouraging sign when interbank lending relies so much on trust.
Key developments that could impact markets on Monday:
– German IFO survey for March stands at around 91.0
– The governor of the Bank of Spain, Pablo Hernández de Cos, gives an economic speech. Speakers were ECB Executive Board members Frank Elderson and Isabel Schnabel, and Bank of England Governor Andrew Bailey
– Federal Reserve Board Governor Philip Jefferson speaks on “Implementation and Transmission of Monetary Policy”
Editing by Jacqueline Wong
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