Market Update Monday 27th March 2023

Banking sector turmoil continues

Uncertainty amongst investors continued following the fallout of SVB last week. The most pressing news came from Switzerland, where on Sunday, Swiss authorities approved the takeover of Credit Suisse by UBS for $2bn. However, as part of the deal, $17bn worth of Credit Suisse additional tier 1 (AT1) bonds, a type of higher-risk bank debt designed to take losses during a crisis, was wiped out by the Swiss financial regulator FINMA. That triggered a sell-off in AT1 bonds at other financial institutions on Monday, as investors began to worry that bondholders would have to take on bigger losses than shareholders.

Other market regulators distanced themselves from the decision, fearful that it would endanger banks’ ability to raise capital in the future. In addition, broader statements of support for the financial sector were made from European Central Bank president, Christine Lagarde, to US Treasury secretary Janet Yellen who signaled the government would back all deposits at smaller US banks if needed.

The slight improvement in sentiment meant that overall, as of 12pm London time, the US market finished higher by 0.82% with the technology index up 1.35%. European gains were minimal as markets have begun to fall again on Friday, led by Deutsche Bank which at time of writing has fallen 13.5% after a surge in the cost of its debt insurance. The UK and European index returned just 0.21% and 0.44% over the week respectively. The Hong Kong index finished up 2.03% whilst the Australian market was one of the few outliers, falling 0.57%, weighed by its real estate sector. Japan also finished lower by 0.21%.

All eyes on the Federal Reserve

Investors’ attention was also firmly focused on monetary policy decisions made on Wednesday as there was heightened speculation over whether the banking sector problems would be enough to cause the Federal Reserve (Fed) to pause. Ultimately the central bank decided to lift rates by 0.25% to a range of 4.75% to 5%. Despite the rate rise, markets were briefly lifted by the accompanying committee statement which removed references for the need of “ongoing” rate rises.

As a result, interest rate-sensitive 2-year Treasuries rallied on the day. As of 12pm London time, its yield which moves inversely to price fell 26 basis points over the week to trade at 3.57%. The 10-year US Treasury also rallied over the week, with its yield falling 14bps to 3.29%. Equivalent 10-year German bunds and UK Gilts also rallied, trading at 2.02% and 3.15% respectively.

UK inflation unexpectedly rises

UK inflation came in higher than expected with the annual rate of consumer price inflation rising 10.4% in February, up from 10.1% in January and higher than the 9.9% forecast by economists. According to the Office of National Statistics, the rise was driven by food and non-alcoholic drink, citing shortages in vegetable items given the high energy costs and bad weather across parts of Europe. As widely expected by market participants, the day after the release of the inflation data, the Bank of England Monetary Policy Committee voted to raise interest rates again, by 0.25% to 4.25%. The committee however kept its options open on whether further rate rises would be required.