In the wake of Credit Suisse’s recent struggles, the Swiss National Bank and financial regulator FINMA have taken action to provide a lifeline of 50 billion Swiss francs ($53.94 billion) to the beleaguered lender. This move has given traders a boost and increased the likelihood of an interest rate decision by the European Central Bank (ECB) later in the day.
As a result of this news, Credit Suisse‘s shares rose more than 20% while the main European indexes and Swiss franc also saw gains of around 1% in early trading. Additionally, Europe’s bank shares bounced 2.3% following a sharp one-day drop in the previous session. Bond traders were also seen selling safe-haven government bonds again ahead of the ECB rate decision.
ECB President Christine Lagarde has been signaling a 50 basis point hike, but due to the recent turmoil in the markets, markets now see it as a roughly 50/50 call between 50 bps and 25 bps. Stefan Gerlach, Chief Economist at EFG Bank in Zurich and a former deputy governor at Ireland’s central bank, expressed concern that the ECB may not be paying enough attention to the risks associated with the banking sector, calling it a potential mistake.
The events of the last week have demonstrated what can happen when major central banks like the U.S. Federal Reserve and the ECB raise interest rates by hundreds of basis points in a short period of time. Gerlach likened the situation to stretching a rubber band, warning that it could eventually break.
Germany’s two-year bond yield, which is highly sensitive to rate expectations, experienced a sharp drop on Wednesday, falling 54 bps on what had been a market-wide scramble for safety. However, it was up 16 bps on Thursday at 2.55%, indicating that investors were still expecting some form of interest rate hike.
While the news of Credit Suisse’s lifeline has helped to calm the markets somewhat, many investors believe it is still too early to give the all-clear. JPMorgan analysts have warned that the loan from the SNB would not be enough to soothe investor concerns, and a takeover for Credit Suisse is now seen as the most likely outcome.
MSCI’s index of Asia-Pacific shares outside Japan fell 1% to its lowest point this year, while Japan’s bank shares also experienced losses. However, two-year U.S. Treasuries are eying their best week since 1987, and yields are down more than 66 basis points since Friday.
Overall, it remains to be seen what impact Credit Suisse’s struggles will have on the global financial markets. However, the recent events have highlighted the need for caution when it comes to interest rate hikes and the potential risks associated with them. As the markets continue to fluctuate, it is important for investors to remain vigilant and stay informed of any developments that may impact their portfolios.
