This week

After a weekend in which struggling 167-year-old Swiss bank, Credit Suisse, was acquired by UBS for $3 billion or 0.76 cents per share, (it was valued at $8 billion on the Friday…), financial markets started another potentially tumultuous week on edge.

As part of the deal, the Swiss National Bank had also provided 100 billion Swiss Francs in liquidity support to UBS, while the Swiss government leant a further 9 billion of guarantees for any potential losses related to the assets taken over. It is hoped the move would provide investors with some solace after a week in which 2 US banks (SVB and Signature Bank) were also forced to close their doors after customers pulled their money in short shrift, sparking fears of another global banking crisis.

From something close to solace to something close to a Solstice, Monday also saw the astronomical start of Spring, ushered in by the Vernal Equinox. Of course, as anyone who has grown up near Stonehenge will tell you, an equinox marks the time when daylight and night-time are approximately the same length, with a solstice occurring on the longest and shortest days (in terms of sunlight).

By Tuesday, investors certainly had a spring in their step, as European banking stocks, which are on their way for their biggest monthly slide in almost three years, rose by 3.8%, helping lift the regional STOXX 600 index by 1.3%. However, worries over the banking system remained, highlighted by a speech from US Treasury Secretary Janet Yellen later in the day, remarking that government intervention was possible if more smaller bank experienced difficulties similar to those that failed last week. With such tension surrounding markets, gold was truly the star performer, shooting to $2,000 an ounce this week for the first time in a year.

Although the news of one of the world’s largest and most prestigious banks failing deserves its place in the sun in terms of newsworthiness, the Federal Reserve’s press conference the following day, did somewhat eclipse it. Choosing to increase rates by 0.25%, to sit in range between 4.75-5%, Fed Chair, Jay Powell, struck a cautionary tone, recognising that raising rates have played their part in the turmoil seen last week, with them “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation."

Interestingly, the Fed's latest policy statement no longer says that "ongoing increases" in rates will likely be appropriate. The term has been used in every policy statement since the 16th March 2022, which was when the decision to start the whole rate hiking cycle took place.

After Powell’s words, the yield on the 2-year Treasury note, which is highly sensitive to Fed rate expectations, was down more than 20 bps in the session. US equity markets were also weak, falling more than 1.5% after it was commented that the US government would not back all deposits during a potential full blown financial crisis.

The following day saw the Bank of England (BoE) make a similar move to their American counterparts, raising domestic base rates by 0.25%, to sit at 4.25%. After inflation was shown to have unexpectedly jumped to 10.4% on an annual basis during Tuesday, there were some calling for a higher rise and yet the BoE struck a relatively positive tone. Believing that the sun will finally be shining down on the UK economy, it seems the bank are no longer worried about an immediate recession.

"We were really a bit on a knife edge as to whether there would be a recession... but I'm a bit more optimistic now," said Bank governor Andrew Bailey. With a rosier picture for the domestic economy now being painted by those on Threadneedle Street, especially amongst a backdrop of failing banks and persistent inflation, it won’t just be the trees that are re-leaved this Spring.

 

Next week

After a 47-hour weekend in Europe, brought on by Daylight Savings Time and the clocks going forward an hour, it would seem that some would probably prefer the extra hours rest all told. After raising rates by another 0.25% and soothing fears over a potential global banking crisis and the UK’s economic prospects last week, Bank of England (BoE) Governor, Andrew Bailey, could probably do with that extra hour in bed.

The start of the coming week will be characterised by two addresses made by Mr Bailey. Monday will see him at the London School of Economics giving a speech about global finance, whilst Tuesday, and possibly more importantly, will see him in Westminster, testifying before the Treasury Select Committee about the collapse of Silicon Valley Bank. As the head of the BoE, his words have a great deal of impact, especially on domestic markets. Those looking for any clues or hints as to future rate policy will scrutinise his words heavily at any address he is due to speak at, making his remarks very important indeed.

The second half of the week will see investor focus shift abroad, first to Germany, for the Eurozone’s largest economy’s inflation data, and then to the US for the quarterly Gross Domestic Product GDP data. GDP numbers are so important as they act as the broadest measure of economic activity and the primary gauge of the economy's health, giving us a good overview of the value of all goods and services produced by a nation.

The week will be wrapped up with US monthly Core PCE Price Index numbers. The data differs from normal inflation readings in that it only measures goods and services targeted towards and consumed by individuals. Prices are weighted according to total expenditure per item which gives important insights into consumer spending behaviour. Adding even more importance to the figures is that this is reportedly the preferred piece of data for the US Federal Reserve, using it as their primary inflation measure.

 

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 24 March 2023.