LDN - Business

ECB rate hike expected after Switzerland backs Credit Suisse

[March 16, 2023] By Marc Jones

LONDON (Reuters) - European markets rebounded on Thursday, as a 50 billion Swiss franc ($53.94 billion) lifeline for beleaguered lender Credit Suisse teed traders up for an European Central Bank interest rate decision later.

Credit Suisse's shares leapt more than 20% and the main European indexes and Swiss franc all rose around 1% in early trading, after the Swiss National Bank and financial regulator, FINMA, took action late on Wednesday.

The SNB confirmed on Thursday that it will provide "liquidity" to the lender. Credit Suisse, which said it is taking "decisive action", will borrow up to 50 billion Swiss francs from one of the world's leading central banks.

Europe's bank shares bounced 2.3% having suffered their steepest one-day drop in more than a year the previous session, while bond traders were selling safe-haven government bonds again ahead of the ECB rate decision later.

ECB President Christine Lagarde has been widely signalling a 50 basis point hike, but the last week of turmoil, which has also seen two U.S. banks collapse, means markets now see it as roughly a 50/50 call between 50 bps and 25 bps.

"I worry that the ECB is not going to pay enough attention to this risk (banking sector problems) and that could be a mistake," said Stefan Gerlach, Chief Economist at EFG Bank in Zurich and a former deputy governor at Ireland's central bank.

The last week demonstrates what happens 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, he added.

"Whenever you do something that large, you know there is a risk waiting somewhere in the financial system," Gerlach said. "It is like stretching a rubber band, if you keep stretching it, is it going to break?"

Germany's two-year bond yield, which is highly sensitive to rate expectations, was last up 16 basis points (bps) at 2.55% having plunged 54 bps on Wednesday in what had been a market-wide scramble for safety.

Overnight, Asian shares had fallen around 1% but it was largely a catch-up move and had none of the frenzy witnessed in Europe the previous day.

Wall Street futures were also pointing to a steady start there later while demand had dropped for both the dollar and gold, the traditional go-to plays for investors during market turbulence.

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Monitors displaying the stock index prices and Japanese yen exchange rate against the U.S. dollar are seen at the Tokyo Stock Exchange in Tokyo, Japan January 4, 2022. REUTERS/Issei Kato/File Photo

CONTAGION

Many investors though said it was far too early to give the all clear.

JPMorgan analysts said the loan from the SNB would not be enough to soothe investor concerns and the "status quo was no longer an option", leaving a takeover for Credit Suisse as the most likely outcome.

"I think we're getting into the hard hat territory again," said Damian Rooney, a dealer at Perth stockbroker Argonaut.

"The word contagion is knocking about...we're getting fear across the whole board here," he said. "The trouble is with the unwinding - you don't know what you don't know."

MSCI's index of Asia-Pacific shares outside Japan fell 1% to its lowest this year. Japan's bank shares, which are also seen as vulnerable to interest rate rises, recovered some even deeper early losses but still ended down 3.25%.

Two-year U.S. Treasuries are eying their best week since 1987 and yields, which fall when prices rise, are down more than 66 basis points since Friday. [US/]

The euro last stood 0.3% higher at $1.0612 and the Swiss franc was up 0.9% at 0.9267 to the dollar. The preference for safety was still supporting the yen which was up 0.4% at 132.89 per dollar in London trading.

Oil prices also clawed back some ground after sliding to 15-month lows in the previous session. Brent crude futures were up 60 cents or 0.8% to $74.29 per barrel while West Texas Intermediate crude futures (WTI) rose to $68.08 a barrel.

($1 = 0.9270 Swiss francs)

(Writing by Marc Jones; Editing by Sharon Singleton)

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