It’s been quite a week but we are not out of the woods yet, albeit things look a fair bit calmer today than they did Wednesday. Volatility was well and truly back: the biggest moves in 2-year Treasury markets since 1987. The VIX touched 28 earlier in the week but is back under 23 this morning. Expectations for the Fed next week have come full circle - some even talked about a cut amid the turmoil of Wednesday, but it looks as though they will stick to their guns at 25bps, taking the cue from the ECB which hiked 50bps as planned yesterday.
European stock markets rallied on Friday morning, with financials +1-3 per cent in early trading, following an upbeat session in the US as Wall Street rallied around regional banks. London, Paris and Frankfurt all rose around 1 per cent but this only took the FTSE 100 back to 7,500. The Nasdaq jumped 2.5 per cent to 11,717 and the S&P 500 rose 1.76 per cent to 3,960 to recover the 200-day line. Oil is firmer with fear receding and with hopes perhaps of an Opec+ move.
Credit Suisse shares rose back to CHF 2.02 yesterday and were a touch higher this morning at CHF 2.04 but no great rally building yet and of send time, the stock was off almost 1 per cent. The liquidity backstop from the SNB gives time, but it’s not the final answer.
Some of the largest Wall Street banks deposited $30bn at embattled First Republic Bank. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo each made a $5 billion uninsured deposit into First Republic Bank, with a variety of others adding $1bn-$2.5bn. “Regional, midsize and small banks are critical to the health and functioning of our financial system,” the group of banks said in a statement.
Shares in FRB had risen 10 per cent but plummeted 17 per cent in extended trading after it said it would suspend its dividend and curtail lending. There are also questions about whether this rescue package is going to work or do further damage. Banks are supposed to be able to fail – forcing Wall St’s systemically important banks (SIBs) to get involved seems like adding risk, not reducing it.
US banks have also tapped roughly $165bn from the Fed's emergency facilities in the week to Wednesday, including record usage of the discount window, according to a filing. You could look at this two ways – one being that the banking system is clearly facing a lot of pressure; the other being that the response is having the desired effect, by and large. It’s hard to think that the Fed put is back – but it is possible for the Fed to ‘ease’ by providing short-term liquidity and simultaneously tightening policy. For investors it will ultimately come down to fear and loathing – what are you most afraid of and what do you hate least?
Neil Wilson is chief market analyst at Finalto
