Switzerland has been at the center of the financial world since the weekend. Its government orchestrated the absorption of Credit Suisse by UBS. Few investors would have though that 2023 would see the demise of the Swiss bank. I doubt the managers at UBS had any desire to buy its rival at the beginning of last week, given its state of decay. But politics, financial stability and the public interest had to be dealt with. So, yes, UBS is going to take on Credit Suisse, but not without having negotiated XXL safeguards with the Swiss authorities. Another bank has fallen.

This new financial crisis is caused by the usual causes: excesses, failures and abuses. U.S. banks that have already fallen (Silvergate, SVB Financial and Signature) are institutions that had benefited from Trump-era deregulation, easy money and, also, in part, the cryptocurrency market. The rise in rates exposed their structural weaknesses. For Credit Suisse, the story is not so different. The Zurich-based institution was entangled in many scandals: Archegos, Greensill, espionage, Mozambique, Bermuda, Bulgaria, Russian oligarchs ... All these cases were the sign of failing internal controls and uncontrolled risk taking. Confidence was shaken, and rightly so, until Sunday's disaster, when a choice had to be made between bankruptcy, nationalization and absorption by UBS.

Let's spend a little time on this deal, because the way it was put together might give some clues about what the future holds for markets.

Technically, the buyer will pay CFH 3 billion, or about $3.2 billion, and take over some of the debt. To put this in perspective, Credit Suisse was still worth CHF 43 billion five years ago, and CHF 35 billion at the beginning of 2021. UBS has conditioned the takeover on a CHF 25 billion guarantee from Berne against a number of risks, as well as other specific protections. In addition, the Swiss National Bank's liquidity valves are wide open to it. The buyback will be carried out by means of a share swap, i.e. the delivery of one UBS share for 22.48 Credit Suisse shares. Based on the prices before the opening (CHF 17.11 and CHF 1.86 respectively), this represents CHF 0.76 per Credit Suisse share. This rescue is unusual because the shareholders will certainly lose a lot of money, but they will not lose everything, as would be customary. Especially since it was announced at the same time that CHF 16 billion of Additional Tier 1 (AT1) bonds were reduced to zero. Shareholders being better off than bondholders in a near-bankruptcy is rare enough to be highlighted, and will surely be challenged in court. The boss of UBS summed up the sentiment quite well when the deal was announced. It is, he said, a good deal for UBS shareholders, but he also reminded us that this is an emergency rescue, with the risks that entails.

Once you explain that, you're not much further ahead. Will other areas of weakness emerge? If I had written two weeks ago that the difficulties of a small Silicon Valley bank would lead to the collapse of Credit Suisse, you wouldn’t have believed me. But here we are, by ricochet. And the message sent, while it may be calming in the short term, is not particularly reassuring. I can tell you that the valuation retained for the bank and the eviction of certain AT1 bondholders are already causing some reassessment of risk and creating new areas of uncertainty (this market represents about $275 billion). Moreover, the Fed and five major central banks (ECB, BoE, SNB, BoC and BoJ) announced yesterday that they will conduct daily dollar auctions starting today to ensure better access to liquidity globally. Usually, these operations are conducted on a weekly basis.

This is the backdrop for the week ahead of the Fed's monetary policy decision on Wednesday. CME's FedWatch tool gives a 60% probability of a 25-basis point rate hike, compared to 40% for a status quo. The option of a 50-basis point hike has disappeared from the landscape due to the banking issues. The next day, the SNB and the BoE will also unveil their decisions on the path of their key rates. Investors are wondering how long central banks will be able to maintain their high interest rate policies. And there is no clear answer. Maintaining a firm stance to fight inflation risks opening new cracks in the banking system. But backing off abruptly would send a panic signal to the markets.

 

Economic highlights of the day:

German producer prices for February and the European trade balance for January are on the agenda today. All the agenda is here. 

The dollar is down 0.4% against the euro to EUR 0.9325 and lost 0.5% against the pound to GBP 0.8158. Gold is up to 1974 dollars. Oil is still under pressure, with North Sea Brent at USD 72.43 a barrel and US WTI light crude at USD 66.01. The 10-year US debt yield continues to decline to 3.41%. Bitcoin is consolidating at around USD 28,000.

 

In corporate news:

  • First Republic Bank - S&P Global downgraded the bank's credit rating to junk, while adding that the recent injection of $30 billion in deposits by 11 major banks may not solve its liquidity problems. 
  • The San Francisco-based bank is in talks to raise funds from other banks or private equity groups, and may also be negotiating a sale deal, The New York Times reported late Friday.
  • Reuters reported on Sunday that no agreement on a fundraising was imminent.
  • JPMorgan, Citi and Bank of America, banks involved in the unprecedented support of Fist Republic Bank, are down between 0.6 percent and 1.5 percent in premarket trading.
  • Credit Suisse, UBS - New York-listed shares of both banks are down 59.6% and 12.5%, respectively, in premarket trading, as the takeover of the troubled bank by rival UBS raises concerns among investors about the stability of the banking system.
  • Goldman Sachs - Traders at the U.S. bank are preparing to bid on Credit Suisse's subprime bond claims, known as Additional Tier 1, Bloomberg reported Sunday, citing people familiar with the matter.
  • New York Community Bancorp - Flagstar Bank, a subsidiary of the bank, has reached an agreement with U.S. regulators to buy Signature Bank's deposits and loans.
  • PacWest Bancorp - Pacific Western Bank, a division of the California-based bank holding company, said Friday it had experienced a "high" number of withdrawals following the collapse of Silicon Valley Bank and Signature Bank, but that deposit activity had stabilized since Monday. 
  • Apple - The Kremlin has asked officials involved in preparations for the 2024 presidential election to stop using iPhones from the U.S. group, as the Russian presidency fears the devices could be vulnerable to Western intelligence agencies, the Kommersant daily reported Monday.
  • Virgin Orbit Holdings - The aeronautical engineering company has begun drawing up contingency plans for insolvency, days after halting operations and laying off staff, Sky News reported Sunday.
  • Berkshire Hathaway, billionaire Warren Buffett's company, has stepped up the pace of its share buybacks, repurchasing more than $1.8 billion of its own shares between Jan. 1 and March 8.
  • Boeing said Friday it has signed a contract worth $1.9 billion with the U.S. military and international customers, including Australia, to build 184 AH-64E Apache helicopters.
  • CF Industries Holding - The world's largest ammonium producer will buy Australian Incitec Pivot's U.S. plant for $1.68 billion, the two groups announced Monday.
  • Chevron, Exxon Mobil - Shares of the two oil companies fall 1.2% and 1.5% in premarket trading as oil prices retreat on concerns about a crisis in the global banking sector, which could hurt fuel demand.
  • GSK, Moderna - Vaccine maker officials told Reuters they could produce hundreds of millions of human bird flu vaccines within months if a new variant of the virus crosses the species barrier.
  • Bed Bath & Beyond - The troubled U.S. retailer said Friday it will seek shareholder approval for a reverse stock split.
  • Karuna Therapeutics is up 19% after saying Monday that its experimental drug KarXT significantly reduced symptoms of schizophrenia in a late-stage trial.

 

Analyst recommendations:

  • Conagra: Deutsche Bank upgrades to hold from sell. PT down 1.5% to $35.
  • Dunelm: Jefferies upgrades from Underperform to Hold with a target of GBp 1250.
  • EastGroup: Mizuho Securities upgrades to buy from neutral. PT up 17% to $185.
  • Kimberly-Clark: Deutsche Bank upgrades to hold from sell. PT down 1.9% to $123.
  • LyonDellBasell: Deutsche Bank upgrades to buy from hold. PT up 18% to $100.
  • Prologis: Mizuho Securities Co initiated coverage with a recommendation of buy.  PT up 21% to $140.
  • New York Community Bancorp: Keefe, Bruyette & Woods upgrades to outperform from market perform. PT rises 61% to $10.50.
  • Roper: Truist Securities initiated coverage with a recommendation of buy. PT up 20% to $510.
  • Unum: Jefferies upgrades to buy from hold. PT up 36% to $50.
  • US Bancorp: Baird upgrades to outperform from neutral. PT jumps 58% to $52.
  • United States Steel raised to Peerperform at Wolfe.
  • VF Corp: Williams Trading upgrades to buy from sell.  PT up 26% to $27.