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Breakfast Bites - Mon Mar 20, 2023

Rise and shine Traderade family


Happy Monday… if it is happy. There’s still a lot of uncertainty in the market this morning, after the takeover of Credit Suisse.


Two big news items coming out of last night

  • Some of the bonds issued by Credit Suisse are going to zero. $17B worth of bonds. These are the Alternative Tier 1 (AT1) bonds. These bonds are inherently more risky and were issued after the Great Financial Crisis in Europe in order to prepare for event just like this. But, that doesn’t mean this isn’t any less scary. High Yield Risk is getting re-priced to the downside this morning and A1 bonds in the Asian market are trading down heavily.

  • The Fed opened up swap lines further. As we’ve been saying, most global debt is priced in USD and it remains a safe haven currency. The recent collapse of CS has put pressure on the demand for USD and the Fed’s swap lines are meant to provide temporary liquidity to foreign Governments so they don’t have to dip into their USD reserves. This will reduce the price of the USD, and is done by the Fed to make sure that the price of credit in the US doesn’t become onerous. Raising rates will drive up the USD as it is and this is move also to ease some of that move. As Mayhem pointed out on Twitter yesterday, this was done in 2007 and is something that’s done in times of additional systemic stress.

US equity futures are off their overnight lows. Gold crossed $2000 while WTI Oil fell further, crossing below $65. This is the markets pricing in a recession. Bitcoin however, remain buoyant crossing $28000 over the weekend, as the market continues to misinterpret the injection of liquidity as easing.


Asia and Australia

  • Asian markets were weaker overnight with Hong Kong down over 2.5% and Japan and Australia reaching nearly 1.5%. There’s been some bounce back since then.

  • The PBoC cut RRR by 25bps post the close on Friday, motivated by the risks facing the Global Banking sector. They are trying to ease credit conditions in China to stimulate growth.

  • Several government sources report the government is planning to add another JPY2T ($15B) to inflation relief measures. How this does not create further inflation is beyond me.

  • Evergrande is said to get creditor support for restructuring

Europe, Middle East, Africa

  • European markets gapped down as futures market opened. What was to be seen as averting a banking crisis with UBS and CS, is actually raising more questions.

  • Other AT1 bonds and high risk credit from European lenders are trading lower this morning. People have suddenly woken up to major potential risk in these bonds.

  • Banks stocks in Europe have given up all their recent gains. While Switzerland is not part of the EU, it remains to be seen what steps the ECB takes to make sure that the crisis doesn’t spread to European banks. I presume that the banking sector in Europe will continue to come under scrutiny. Christine Lagarde speaks at 10am ET.

  • German PPI came in slightly higher than expected at 15.8% YoY vs. 15.4% forecasted. The number has eased from last month’s 17.6%.

The Americas

  • The American Banking system is still not out of the woods. First Republic (FRC) is down -20% in the pre-market as we speak, even after the deposit injection of $30B last month. There’s news that FRC is still looking to raise cash through a share sale.

  • New York Community Bancorp’s (NYCB) subsidiary Flagstar Bank is taking over Signature Bank New York (SBNY). substantially all of Signature Bank's deposits, some of its loan portfolios and all 40 of its former branches. Under the arrangement, Flagstar will buy $12.9 billion of loans at a discount of $2.7 billion. Roughly $60 billion of SBNY’s loans & $4 billion of its deposits would still remain with it in receivership.

  • The market is pricing in a higher probability of a 25bps hike on Wednesday from the Fed. As we discussed, not hiking right now sends a really bad signal to the market. It would confirm further panic and therefore, the Fed is taking every other measure to stabilize the markets so they can continue to hike and fight inflation, which remains somewhat sticky.

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