US equity futures, global markets and European bank stocks have stabilized, rebounding off worst levels which saw Europe's brand new banking megagiant UBS plunge as much as 16% before recouping most of the losses...

... as investors digested UBS’s agreement to buy Credit Suisse as well as central bank moves to boost dollar liquidity in an effort to restore confidence in the global financial system. Futures contracts on the S&P 500 were little changed at 7:30 a.m. ET after tumbling 1% earlier. The Stoxx Europe 600 index was modestly higher, with banks and financial services still the sharpest fallers. UBS shares sank as much as 16%, while Credit Suisse sank 60%. European bank stocks pared losses with the Stoxx Europe 600 Banks Index down less than 1%, after after dropping as much as 6%. A gauge of Asian shares fell by more than 1%.

In premarket trading, First Republic Bank was poised to extend last week’s record loss as the US lender’s shares plunged 19% after S&P cut its credit rating again. Wells Fargo and Citigroup trimmed US premarket declines. Gold-mining stocks rallied in premarket trading on Monday, after a $3.2 billion deal between UBS and troubled lender Credit Suisse failed to calm nerves in the banking industry, knocking risk appetite. Newmont, the biggest US-listed gold miner, gains as much as 2.6%; Harmony Gold Mining +5.6%, Gold Fields +2.2%, New Gold +3.4%, Wheaton Precious Metals +1.5%, First Majestic Silver +2%, Pan American Silver +0.7%. The price of gold rose above $2,000 an ounce for the first time in a year amid safe-haven appeal. Here are some other notable premarket movers:

• Cryptocurrency-exposed stocks rise after Bitcoin extended its gains for a fifth consecutive session, with the digital asset reaching levels not seen in about nine months. Marathon Digital (MARA US) +5.6%, Riot Platforms (RIOT US) +8% and Coinbase (COIN US) +4.2%
• Energy stocks decline as investors’ concern about the banking system spur broad risk aversion and drag crude prices lower. Exxon Mobil (XOM US) slid 1.3%, Chevron (CVX US) -1.1%, Occidental Petroleum (OXY US) -1.1%.

For those who were lucky enough to be away from their computers this weekend, this is what you missed:

• Credit Suisse shareholders will receive 1 share in UBS (UBSN SW) for 22.48 shares in Credit Suisse which reflects a merger consideration of CHF 3bln and that FINMA determined that Credit Suisse’s additional tier 1 capital in the aggregate nominal amount of around CHF 16bln will be written off. Credit Suisse also told staff in a memo that the details of the transaction are being worked through and no disruption to client services is expected, while it told staff there will be no changes to payroll arrangements and bonuses will still be paid on March 24th.
• UBS said the company will suspend share buybacks and that they did not initiate the discussions but believe the transaction is financially attractive to UBS shareholders and are planning to de-risk and downsize Credit Suisse’s investment banking operations. UBS also noted its strategy is unchanged in US and APAC and said that Credit Suisse is quite complementary to the wealth business in Southeast Asia. Furthermore, Colm Kelleher will be Chairman and Ralph Hamers will be Group CEO of the combined entity, while the transaction is not subject to shareholder approval and there is a material adverse change clause on the Credit Suisse deal.
• SNB said it is providing substantial liquidity assistance to support the UBS takeover of Credit Suisse and the takeover was made possible with the support of the Swiss federal government, FINMA and SNB, while it added that both banks have unrestricted access to the SNB’s existing facilities. There were also comments from the Swiss Finance Minister that this is a commercial solution and not a bailout, while she noted the cost of bankruptcy to the Swiss economy would have been huge.
• ECB said it welcomes the swift actions and decisions taken by Swiss authorities and noted that the Euro area banking sector is resilient with strong capital and liquidity positions. ECB’s Lagarde also stated that the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed.
• BoE said it welcomes the comprehensive actions by the Swiss authorities to merge UBS and Credit Suisse, while it has been engaging with international counterparts throughout preparations for the announcement. Furthermore, it stated that the UK banking system remains safe and sound and is well-capitalised and funded.
• Fed Chairman Powell and US Treasury Secretary Yellen said they welcome the announcements by Swiss authorities to support financial stability and noted the capital and liquidity positions of the US banking system are strong and US financial system resilience is strong. Furthermore, they have been in close contact with international counterparts to support their implementation.
• At least two major banks in Europe are examining scenarios of contagion potentially spreading across Europe’s banking sector and looking to the Fed and ECB to step in with stronger signals of support, according to Reuters citing executives with knowledge of the deliberations.
• Banking stocks and bonds plummeted after UBS Group sealed a state-backed takeover of troubled peer Credit Suisse, a deal that was shoved down Credit Suisse investors' throats - literally - in an attempt to restore confidence in a battered sector.
• The Federal Reserve and five other central banks announced coordinated action on Sunday to boost liquidity in US dollar swap arrangements. The Fed’s next policy decision is due later this week, with market attention on whether it may slow or pause interest-rate hikes.
• UBS emerged as Switzerland’s one and only global bank, a risky bet that makes the Swiss economy more dependent on a single lender. Credit Suisse told staff its wealth assets are operationally separate from UBS for now, but once they merged clients might want to consider moving some assets to another bank if concentration was a concern.
• The rudest shock in the rushed deal was reserved for the holders of Credit Suisse's riskiest tranche of bonds. UBS is salvaging the most value from the wreckage, says Breakingviews columnist Liam Proud.
• Hedge fund managers and other large investors believe it is far too soon to call an all-clear on turmoil in the global financial sector.

Amid the endless turmoil, the KBW Bank Index plunged 28% over the past two weeks, with financials rattled by concerns over Credit Suisse as well the recent failures of Silicon Valley Bank and two other US lenders. Gains in tech stocks have helped support the overall market, however, as investors look for a safe haven.

"The turmoil still has at least a couple of days to play out, and only the Fed can come in and calm that,” Chris Beauchamp, chief market analyst at IG Group Holdings Plc, said on Bloomberg Television. He expects the US central bank to hike rates by 25 basis points as a pause would be interpreted by markets as a sign that the stress in banks is bigger than initially thought.

“Assuming these banking stresses do not evolve into something more serious, the European Central Bank and the Fed may perceive that they are at or near their objectives with current policy,” said Brad Tank, chief investment officer for fixed income at Neuberger Berman. “The Fed, in particular, is further along in its tightening cycle and should have more flexibility to pause — and markets are indeed pricing for 2023 fed funds rate cuts once again.”

Meanwhile, one day after he revealed his shock that stocks remain resilient and just under 4,000 despite calling for a crah for the past 3 months, Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be the beginning of a painful and “vicious” end to the bear market in US stocks, adding that the risk of a credit crunch has increased materially. The S&P 500 will remain unattractive until equity risk premium climbs to as high as 400 basis points from the current 230 level, according to the bearish strategist who two weeks ago flip-flopped briefly to bullish before getting rugpulled by the banking crisis.

European stocks are higher after reversing the negative knee-jerk reaction to the terms of the UBS takeover of Credit Suisse. The Stoxx 600 is up 0.6% as gains in utilities, miners and consumer products outweigh declines in bank stocks.  European oil stocks declined as investors’ concern about the potential for a global banking crisis spur broad risk aversion and drag crude prices lower. The Stoxx Europe 600 Energy index slid 1%; among oil majors, Shell declined 1.5%, TotalEnergies -1.3%, and BP -0.6%. Smaller producers also dropped with Harbour Energy falling 5.7% and Tullow Oil -7.7%. Here are the biggest European movers:

• UBS shares drop as much as 16%, the most in eight years, after a government-brokered deal for it to buy rival Credit Suisse prompted a slew of downgrades
• Deutsche Bank declines 11%, ING -9.6%, Commerzbank -9.6%, Standard Chartered -8.7%, BNP Paribas -9% following UBS’s agreement to buy Credit Suisse
• El.En shares slide as much as 9.6% after Berenberg downgrades the laser- equipment maker to hold from buy, saying the company has a “tough year ahead”
• JM AB falls as much as 7.7% after DNB Markets gave the Swedish construction and building management company its sole sell rating in reinstated coverage
• Centamin shares rise as much as 6.6%, Endeavour Mining up as much as 7.2% and Fresnillo rises as much as 4.1% as gold gains owing to haven demand amid banking concerns

Earlier in the session, Asian stocks declined as the UBS takeunder failed to quell investor concerns about the health of the global financial system.  The MSCI Asia Pacific Index fell as much as 1.4%, reversing most of its gain from Friday, with tech and financial names among the biggest drags. Hong Kong gauges led losses in the region as financial stocks including HSBC and AIA Group fell due to worries over risky bond exposures.  While the takeover of Credit Suisse is seen to reduce the immediate systemic risk for the banking sector, investors are worried over further repercussions from its bonds. Traders are also focused on the Federal Reserve’s rate decision later this week.

“Even with the rescue plans over the weekend, it is hard to predict what will happen in the near future,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The measures to restore confidence in banks and to tame inflation go in opposite directions, and the dilemma is reducing risk appetite in the stock market.” China’s onshore equity benchmark erased earlier gains even after its central bank unexpectedly cut the reserve requirement ratio late Friday.  The PBOC’s announcement timing “seems to fall in line with recent global banking jitters, which suggests that the PBOC is on high alert to provide any cushion against any knock-on impact from recent turmoil,” said Jun Rong Yeap, market strategist at IG Asia

In FX, the Bloomberg Dollar Spot Index steadied, erasing a decline of as much as 0.2% earlier while the Japanese yen is the best performer among the G-10’s. The New Zealand dollar is the weakest. Australia and New Zealand’s currencies flipped to losses amid souring risk sentiment.

“Traders are looking for haven assets again with bank stocks falling, and worries about CoCo bonds gaining momentum,” Mingze Wu, a foreign exchange trader at StoneX Group, said of contingent convertible bonds. “The insistence of the Swiss National Bank to make the UBS-Credit Suisse deal happen suggests the rot was deeper and greater than they might have thought, and the dollar is an obvious beneficiary of this rush to safety”

In rates, the nervous start to the trading week prompted a flight to safety, with German and UK government bonds rallying. 2-year TSY yield fell as much as 21bps to 3.63%, while its 10- year peer slid to as low as 3.29%, the lowest since September; traders bet on 15bps of Fed hikes this week but eased tightening beyond by as much as 12bps, pricing 105bps of cuts from the peak in May through to year-end. Bund futures are off their best levels but still in the green with 10-year yields down 4bps while two-year yields fall 8bps.

In commodities, oil prices fell again with West Texas Intermediate briefly plunging below $65 a barrel, as escalating investor concerns about a global banking crisis eroded appetite for risk assets including commodities. Gold steadied, after rising above $2,000 an ounce for the first time in a year.

Bitcoin remains bid and has extended comfortably above the USD 28k handle for the first time since June, though is yet to convincingly breach USD 28.5k to the upside.

There is nothing scheduled on the macro calendar today but there will be plenty of bank related newsflow.

Market Snapshot

• S&P 500 futures down 0.1% to 3,943.50
• MXAP down 1.1% to 155.86
• MXAPJ down 1.4% to 498.89
• Nikkei down 1.4% to 26,945.67
• Topix down 1.5% to 1,929.30
• Hang Seng Index down 2.7% to 19,000.71
• Shanghai Composite down 0.5% to 3,234.91
• Sensex down 1.3% to 57,214.31
• Australia S&P/ASX 200 down 1.4% to 6,898.51
• Kospi down 0.7% to 2,379.20
• STOXX Europe 600 up 0.6% to 438
• German 10Y yield little changed at 1.95%
• Euro down 0.3% to $1.0641
• Brent Futures down 3.8% to $70.18/bbl
• Gold spot up 0.8% to $2,005.59
• U.S. Dollar Index up 0.17% to 103.88

Top Overnight News from Bloomberg

• The Federal Reserve and five other central banks announced coordinated action Sunday to boost liquidity in US dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.
• UBS Group AG shares slumped Monday as investors digested the news of its historic acquisition of rival Credit Suisse Group AG and began to assess the job of integrating the troubled Swiss lender.
• The riskiest bonds of European lenders are plunging after holders of Credit Suisse Group AG’s contingent convertible securities suffered a historic loss as part of its takeover by UBS Group AG.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were on the back foot amid ongoing banking sector jitters despite the announcement that UBS will take over Credit Suisse in an emergency rescue valued at CHF 3bln which would wipe out CHF 16bln of additional tier 1 bonds. ASX 200 extended its retreat from a recent break beneath 7,000 with declines led by weakness in the energy, real estate,  consumer and financial sectors, although gold miners were boosted after last week’s climb in the precious metal. Nikkei 225 was pressured amid the banking sector woes and after the BoJ’s Summary of Opinions provided little in the way of new information whereby it reiterated that the BoJ must patiently maintain monetary easing. Hang Seng and Shanghai Comp. were varied with Hong Kong underperforming on broad weakness across sectors, while the mainland was kept afloat for most of the session after Friday’s surprise RRR cut by the PBoC in an effort to boost liquidity and support the economy, but opted to maintain its benchmark lending rates.

Top Asian News

• PBoC 1-Year Loan Prime Rate (Mar) 3.65% vs. Exp. 3.65% (Prev. 3.65%); 5-Year Loan Prime Rate (Mar) 4.30% vs. Exp. 4.30% (Prev. 4.30%)
• PBoC warned the collapse of Silicon Valley Bank shows rapid monetary policy shifts in developed economies are having a hazardous impact on financial stability, according to Bloomberg citing comments from Deputy Governor Xuan.
• PBoC adviser Cai said China needs household stimulus to boost the recovery and noted that residents' incomes have not grown well in the past few years, so the recovery in consumption is not enough to support economic growth, according to Caijing.
• Russian President Putin said he expects total trade volume with China to exceed USD 200bln this year and it is important to increase the share of trade with China conducted in national currencies, according to Reuters.
• WHO advisers urged China to release all information related to the origin of the COVID-19 pandemic after new findings were briefly shared on an international database to track pathogens, while they recommended researchers in China investigate upstream sources of animals and animal products present in the Huanan Market before January 1st 2020, according to Reuters.
• BoJ Summary of Opinions from the March meeting stated that the BoJ must patiently maintain monetary easing until the price target is achieved and the BoJ must scrutinise without any preset idea the state of market function but must maintain easy policy at present. Furthermore, it stated the BoJ must focus on the risk of losing the chance to meet the price target with a premature policy shift, rather than the risk of being too late in shifting policy and must be mindful of the risk inflation may overshoot expectations.

European bourses are mixed/flat, as marked banking-led pressure has eased throughout the morning following the initial reaction to the UBS-Credit Suisse merger. On this, Credit Suisse and UBS opened lower by over 60% and 8% respectively, but have since eased off lows with the broader SX7P index now ~2% lower vs downside of over 5% at worst. On the merger, attention is on Credit Suisse's AT1 bonds being written off; a detail which pressured such bonds in APAC trade, with HSBC for instance a notable initial laggard on this. Since, we have seen European regulators reiterate  that CET instruments are the first to absorb losses, with AT1 only required after their full use. Stateside, futures are in similar proximity to the unchanged mark given the above as participants await updates around  First Republic and look ahead to the FOMC.

Top European News

• BoE's plans to revamp bank capital rules risk a 25% reduction in lending to small businesses which threatens jobs and economic growth, according to a study by consultants Oxera cited by FT.
• PoliticsHomes' Payne reminds that DUP MPs meet today to discuss their stance on Wednesday's Windsor Framework vote, expected to announce their stance on Tuesday.
• Moody’s affirmed Greece at Ba3; Outlook revised to Positive from Stable and affirmed Luxembourg at AAA; Outlook Stable, while S&P affirmed Belgium at AA; Outlook Stable.

FX

• The DXY has struggled to benefit from the subdued start to the session, with the index near the mid-point of 103.68-103.96 parameters for much of the morning.
• Given the tone, the JPY is the standout outperformer with USD/JPY down to 130.55 vs 132.64 peak; though, given the relative pickup in equity performance USD/JPY is now holding above 131.00.
• Despite the subdued risk tone, CHF is the underperformer as the market's focus remains on Credit Suisse/UBS; USD/CHF above 0.93 and EUR/CHF above 0.99.
• Given their high-beta status, the Antipodeans are also faring poorly with RBA minutes and Kiwi trade data scheduled ahead.
• Elsewhere, peers are comparably more contained with EUR/USD holding above 1.0650 and Cable near 1.22.
• PBoC set USD/CNY mid-point at 6.8694 vs exp. 6.8701 (prev. 6.9052)

Fixed Income

• EGBs and USTs are benefitting from marked haven demand, with Bunds over 140.00 and USTs nearing 117.00 at best, though the benchmarks have eased from highs as equity sentiment improves.
• Specifically, Bunds soared to a 140.30 peak vs 137.10 low, but have since pulled back to just below 140.00 as the associated 10yr yield slipped to a 1.92% intraday low.
• Stateside, USTs are similar in both direction and magnitude with yields lower across the curve and action more pronounced in the short-end currently; as it stands, market pricing via Reuters is leaning towards the Fed leaving rates unchanged on Wednesday, with around a 40% chance of a 25bp hike implied.

Commodities

• WTI and Brent are lower intraday given the broader risk tone and while they are off lows, are yet to stage a 'recovery' akin to that seen in equities; currently, the benchmarks are lower by circa. USD 2/bbl just above USD 64.12/bbl and USD 70.12/bbl respective lows.
• Spot gold surpassed USD 2000/oz, but failed to hang onto the level as the DXY makes its way back into positive territory and broader sentiment improves slightly while base metals are moving with equity sentiment and as such are turning incrementally firmer on the session.
• Iraq’s Oil Minister said his country is committed to OPEC’s agreed production rates and obliged some oil companies' operations in the south to cut production to come in line with OPEC’s agreed rates, while it was also reported that Iraq and OPEC stressed the importance to coordinate to stabilise prices, according to Reuters.
• Iran set April Iranian light crude oil price to Asia at Oman/Dubai plus USD 2.50/bbl, according to Reuters.
• India plans to extend export restrictions on diesel and gasoline beyond March 31st, according to Reuters sources.
• TotalEnergies (TTE FP) said 34% of operational staff at its refineries and depots conducted a strike on Sunday morning in protest against the government’s move to raise the retirement age by two years, according to Reuters.
• Kuwait Oil Company declares a state of emergency re. an oil spill located in west Kuwait; production unaffected.

Geopolitics

• Russian President Putin visited Crimea on the 9th anniversary of its annexation from Ukraine and also visited Mariupol in the occupied Donetsk region of Ukraine, while he also met with the top command of Russia’s military operation in Ukraine at the Rostov-on-Don command post in southern Russia, according to Reuters.
• Russian President Putin said the visit by Chinese President Xi confirms the special character of the Russian-Chinese partnership and Russia is pinning big hopes on the visit, while he added Russia is expecting a powerful impulse to relations and that relations are at their highest ever point. Putin also said there are no limits or forbidden subjects in relations with China and he is grateful for China’s balanced line on events in Ukraine, as well as welcomes China’s willingness to play a constructive role in solving the Ukrainian crisis. Furthermore, Putin said that they are worried about dangerous actions that could undermine global nuclear security and Russia is open to a diplomatic settlement of the Ukraine crisis but rejects ultimatums, according to Reuters.
• Chinese President Xi said China has always taken an objective and impartial position on the situation in Ukraine and has made efforts to promote reconciliation and peace negotiations, according to Rossiiskaya Gazeta.
• ICC judge issued an arrest warrant for Russian President Putin over alleged war crimes related to ‘unlawful deportation’ of Ukrainian children, according to The Guardian. It was also reported that German Chancellor Scholz said ICC is an important institution that has been given a mandate through international treaties and noted that nobody is above the law which is becoming clear now, according to Reuters.
• Ukrainian President Zelensky’s Chief of Staff and several top security officials including the Defence Minister held a call with US counterparts to discuss military aid for Ukraine, according to Reuters.
• Ukrainian Infrastructure Minister said the Black Sea grain deal has been extended for 120 days which is longer than the 60-day touted by Russia, while a UN spokesman confirmed the extension of the export deal but didn’t specify the length of the renewal, according to Reuters.
• EU foreign policy chief Borrell said an agreement was reached on ways to implement an EU-backed deal on normalising ties between Serbia and Kosovo, while he added that the sides agreed to implement their respective obligations in good faith.
• Saudi Arabia’s King Salman invited Iranian President Raisi to visit Riyadh, while it was also reported that Iran’s Foreign Minister agreed to hold a meeting at the foreign minister level with Saudi Arabia and said that Iran has declared a readiness to reopen embassies. In other news, Iraq and Iran signed a deal to tighten their border security.
• South Korea said that North Korea fired a short-range ballistic missile off the east coast into the sea on Sunday which flew 800km before hitting a target and is a clear violation of the UN Security Council resolution. In relevant news, G7 foreign ministers said they regret inaction by the UN Security Council regarding North Korea’s missile tests and that the March 16th ICBM launch undermines international peace, according to Reuters.
• North Korea confirmed it conducted exercises aimed at improving tactical nuclear capability on March 18th-19th and said the US and South Korea are expanding joint military drills aimed at North Korea involving US nuclear assets and its exercises are meant to send strong warnings against US and South Korea. Furthermore, North Korean leader Kim said the country should be ready to conduct nuclear attacks at any time in a deterrence of war, according to KCNA.

US Event Calendar

• Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

This weekend felt like being transported back into 2007-2008 in many respects with a race-against-time deal between UBS and Credit Suisse being put together in full view of the market. The most remarkable thing about yesterday was the huge swings in Credit Suisse AT1s on a Sunday. Clips of the $17.3bn of outstanding CS AT1 bonds seemed to trade at both ends of a mid-20s to around 70c range as the outline of the UBS deal filtered through. It was eventually a shock that the AT1s were zeroed in the deal even as UBS eventually bought CS for $3.3bn, a firmly positive number. This was however less than half what they were worth at the close on Friday and down 99% from their peak pre-GFC.

The decisions to wipe out AT1 bondholders is going to be the biggest issue medium and longer-term for the European banking sector, especially when the company was bought with a positive value yesterday. It's hard to argue with the morals of it but it will likely increase the cost of capital for banks which could lead to an additional tightening of lending conditions. So that c.$17bn of debt destruction could eventually be worth multiples of that to the wider European economy and in other regions too. Selected Asian AT1 securities are trading around 5-10% down as we type and HSBC equity is around -6% in Hong Kong so this serves as a benchmark for the European banking open.

The good news at the macro level is that the CS situation has been dealt with and there are no obvious European next shoes to drop at this stage. CS had been decoupled from the rest of the continents' banking sector for months now and therefore was by far and away the weakest link when the US regional banking woes began less than 2 weeks ago. So the market has now got to balance the reduction of systemic risk with the likely higher cost of some forms of bank capital. There will also be nervousness as to how easy it was to change laws and market conventions in order to get this deal done. Some risk premium will surely be factored in to the cost of capital for the sector now.

Meanwhile, in a coordinated global response, the Fed in a statement along with five other central banks - including the BOE, the BOJ, the ECB and the SNB - last night announced that they would enhance dollar swap lines i.e., to increase the frequency of swap line agreements from weekly to daily, beginning March 20 and will continue “at least” through the end of next month. In doing so, the central banks indicated that the move would serve as an “important backstop” amid financial market unease, thereby helping to keep credit flowing to households and businesses.

Overall, Asian equity markets have started the week on a weaker footing with the Hang Seng (-2.56%) leading losses across the region, with the Nikkei (-1.01%) and the KOSPI (-0.46%) also dipping in early trade. Elsewhere, stocks in mainland China are bucking the regional negative trend with the CSI (+0.12%) and the Shanghai Composite (+0.12%) both trading slightly higher. Note their was a 25bps RRR cut on Friday.

Outside of Asia, US stock futures tied to the S&P 500 (+0.12%) and NASDAQ 100 (+0.23%) are relatively flat which helps after the weekend news but then again as you'll see from the weekly review at the end the S&P 500 was higher last week in the face of incredible turmoil elsewhere. Meanwhile, yields on 10yr US Treasuries are stable while 2yr yields (+2.92bps) briefly touched 4% before sliding back to 3.87% as we go to press.

Moving forward, it's hard not to have sympathy for the Fed this week. Any criticism of their policy should probably be more directed to the actions of 2020-2021 for keeping policy excessively too loose as government spending, money supply and inflation was surging. Today they are in a catch-22 position where the excesses of those days (and earlier) are now unravelling while inflation is still way above target. Their rate decision on Wednesday will be the undoubted non-banking related highlight of the week but we will also have the BoE meeting (Thursday), UK CPI (Wednesday), Japan CPI (Thursday), flash global PMIs (Friday) which might capture a small amount of the turmoil period, and importantly Chinese President Xi Jinping will be in Moscow from today to Wednesday.

After the FOMC, it will be the BoE's turn on Thursday to decide on rates. Our UK economists preview the meeting here and expect a final +25bps hike as well as likely dovish forward guidance amid concerns over overtightening risks. The decision will follow a host of UK inflation data released on Wednesday. Also on Thursday markets may follow the SNB meeting more closely than usual following this week's turmoil around Credit Suisse.

Aside from several monetary policy decisions, there will also be a plenty of central bank speakers, especially from the ECB, including President Lagarde (twice), following last week's +50bps hike.

In the US, aside from the PMIs investors will also get durable goods orders (DB forecast -0.5% vs -4.5% in January) on Friday and a host of regional Fed indicators throughout the week to gauge economic sentiment. Housing market data including existing home sales (tomorrow) and new home sales (Thursday) are also due.

Over in Europe, other key data will include the PPI (today) and the ZEW survey (tomorrow) for Germany, Eurozone consumer confidence on Thursday and UK consumer confidence and retail sales on Friday.

Moving on to Japan, the key release will be the CPI report on Thursday. Our Chief Japan Economist (full preview of the week ahead here) expects government subsidies for electricity and gas to weigh on core CPI inflation (3.2% vs +4.2% in January) but core-core CPI ex. energy to pick up 3.4% (3.2%) but reach its peak for the cycle.

Looking back on a tumultuous last week now. On Friday, with market volatility already elevated from the growing concerns around the global financial system the preliminary University of Michigan sentiment survey dropped -4.6pts to 63.4. That was just the second monthly drop since last June, and the lowest reading since December. The declines pre-dated the SVB collapse. If one wanted to find a positive in the report inflation expectations were lower with 5-10yr expectations down to 2.8% (2.9% expected), while the 1yr inflation expectation was 3.8% (4.1% expected). That’s the lowest 1yr expectations have been since April 2021.

That was just the last link in a chain of market moving events last week that repriced Fed futures across the curve. Expectations for a 25bps hike at the March meeting is now at just 60% with a 15.0bp hike priced in. That is down -18.3bps on the week and -4.2bps on Friday, as well as -27.8bps since Powell’s testimony before the Senate Banking Committee the week before last. At the same time, the expected terminal rate ended the week at 4.794% by the May meeting after starting the week at 5.285% at the June meeting and being as high as 5.691% at the September meeting on the prior Wednesday before the SVB news broke. Futures are also now pricing in nearly -96bps of rate cuts by year-end after starting the week with -40bps of cuts priced.

10yr Treasury yields fell back another -14.8bps on Friday and -27.0bps over the course of the week to their lowest level since early-February at 3.429%. The 2yr yield saw a much bigger move, coming down -74.9bps last week (-32.0bps on Friday) to their lowest level since September 2022. On this side of the pond, 10yr bund yields fell back -40.0bps (-18.2bps on Friday) last week to 2.108%, its lowest point since the first week of February. The 2yr bund yield fell by -71bps last week (-22.0bps Friday) in its most significant weekly down move since September 1992.

While sovereign bonds outperformed last week, US equities whipsawed with a large amount of dispersion. Even though the S&P 500 closed the five days higher, US banks continued to selloff with the KBW bank index down -14.55% last week (-5.25% Friday), with major banks like JPM (-5.87%), BofA (-8.09%), Citi (-8.46%), and GS (-7.26%) outperforming while the regional bank ETF KRE was down -14.30% last week. With CS seeing pressure from a lack of depositor and investor confidence, the SNB offered the Swiss bank a 50bn franc credit line. However this was not enough to stop the stock from ending the week -25.48% lower (-8.01% Friday), while European Banks at large were down -13.40% (-2.72% Friday) leaving the index up just +1.2% YTD. The STOXX 600 was down -3.85% week-on-week (-1.21% on Friday), whilst the CAC and DAX fell -4.09% (-1.43% on Friday) and -4.28% (-1.33% on Friday) respectively.

With risk markets selling off, credit spreads widened significantly on the week once again. The Euro Crossover HY CDS index was +66.7bps wider (+18.8bps wider Friday) and EUR IG CDS +18.1bps wider on the week (+3.8bps Friday). EUR HY CDS is now +18.9bps wider YTD, with EUR IG +9.9bps wider since the start of the year. US credit also significantly widened again as the US HY CDS index was +31.6bps wider (+26.8bps Friday) with IG +4.8bps wider following a +5.1bps move on Friday. The weekly widening has left USD HY CDS +45.7bps wider YTD, while US IG CDS was +5.8bps wider YTD.

Finally in commodities, industrial inputs sold off as recession fears rose. Brent crude fell back -11.85% (-2.32% on Friday) and WTI was down -12.96% (-2.36% on Friday), meanwhile European natural gas futures reversed the prior week’s significant rally with energy prices falling -18.92% week-on-week (-3.35%). Copper was down -3.26% (+0.72% Friday) while the overall Bloomberg Commodity index was down -1.87% (-0.16% Friday). With the risk-off tone throughout markets, Gold was a notable outperformer with the precious metal up +6.48% on the week (+3.63% Friday) in its best weekly performance since Covid to close at its highest level in a year at $1989/oz.

Authored by Kenneth Rogoff, op-ed via The Financial Times,

The Fed’s expansive actions to prevent the Silicon Valley Bank collapse from becoming systemic, followed by the Swiss National Bank’s massive lifeline to troubled Credit Suisse, left little doubt this week that financial leaders are determined to act decisively when fear starts to set in. Let us leave moral hazard for another day.

But even if risks of a 2023 financial Armageddon have been contained, not all the differences with 2008 are quite so reassuring.

Back then, inflation was a non-issue and deflation — falling prices — quickly became one. Today, core inflation in the US and Europe is still running hot, and one really has to strain the definition of “transitory” to argue that it is not a problem. Global debt, both public and private, has also skyrocketed. This would not be such an issue if forward looking, long-term real interest rates were to take a deep dive, as they did in the secular stagnation years prior to 2022.

Unfortunately, however, ultra-low borrowing rates are not something that can be counted on this time around.

First and foremost, I would argue that if one looks at long-term historical patterns in real interest rates (as Paul Schmelzing, Barbara Rossi and I have), major shocks — for example, the big drop after the 2008 financial crisis — tend to fade over time. There are also structural reasons: for one thing, global debt (public and private) exploded after 2008, partly as an endogenous response to the low rates, partly as a necessary response to the pandemic. Other factors that are pushing up long-term real rates include the massive costs of the green transition and the coming increase in defence expenditure around the world. The rise of populism will presumably help alleviate inequality, but higher taxes will lower trend growth even as higher spending adds to upwards pressure on rates.

What this means is that even after inflation abates, central banks may need to keep the general level of interest rates higher over the next decade than they did in the last one, just to keep inflation stable.

Another significant difference between now and post-2008 is the far weaker position of China. Beijing’s fiscal stimulus after the financial crisis played a key role in maintaining global demand, particularly for commodities but also for German manufacturing and European luxury goods. Much of it went into real estate and infrastructure, the country’s massive go-to growth sector.

Today, however, after years of building at breakneck speed, China is running into the same kinds of diminishing returns as Japan began to experience in the late 1980s (the famous “bridges to nowhere”) and the former Soviet Union saw in the late 1960s. Combine that with over-centralisation of decision-making, extraordinarily adverse demographics, and creeping deglobalisation, and it becomes clear that China will not be able to play such an outsized role in holding up global growth during the next global recession.

Last, but not least, the 2008 crisis came during a period of relative global peace, which is hardly the case now. The Russian war in Ukraine has been a continuing supply shock that accounts for a significant part of the inflation problem that central banks are now trying to deal with.

Looking back on the past two weeks of banking stress, we should be thankful that this did not happen sooner. With sharply rising central bank rates, and a troubled underlying economic backdrop, it is inevitable that there will be many business casualties and normally emerging market debtors as well. So far, several low-middle income countries have defaulted, but there are likely to be more to come. Surely there will be other problems besides tech, for example the commercial real estate sector in the US, which is hit by rising interest rates even as major city office occupancy remains only about 50 per cent. Of course the financial system, including lightly regulated “shadow banks,” must be housing some of the losses.

Advanced economy governments are not all necessarily immune.

They may have long since “graduated” from sovereign debt crises, but not from partial default through surprise high inflation.

How should the Federal Reserve weigh all these issues in deciding on its rate policy next week?

After the banking tremors, it is certainly not going to forge ahead with a 50 basis point (half a per cent) increase as the European Central Bank did on Thursday, surprising markets. But then the ECB is playing catchup to the Fed.

If nothing else, the optics of once again bailing out the financial sector while tightening the screws on Main Street are not good. Yet, like the ECB, the Fed cannot lightly dismiss persistent core inflation over 5 per cent. Probably, it will opt for a 25 basis point increase if the banking sector seems calm again, but if there are still some jitters it could perfectly well say the direction of travel is still up, but it needs to take a pause.

It is far easier to hold off political pressures in an era where global interest rate and price pressures are pushing downwards. Not anymore. Those days are over and things are going to get harder for the Fed. The trade-offs it faces next week might only be the start.

Similar to Thursday, futures faded an earlier gain which pushed emini futures briefly above 4000 after the index rallied 1.8% yesterday, as investors were assessing whether a $30BN "deposit injection" rescue package for First Republic Bank is enough to ease the risk of financial contagion, with gains reversing after news that China was cutting its bank reserve ratio and injecting over $70BN in liquidity, which was viewed by the jittery, suspicious market that there may be more unpleasant surprises in the banking sector this time in China which was moving to "ringfence its banking sector." US equity-index futures dropped 0.3%, reversing a similar gain, while the Stoxx Europe 600 index pared an advance and turned negative. A gauge of European banking stocks is heading for a drop of almost 9% this week. Nasdaq 100 futures were flat as the rates-sensitive gauge heads for its best week since November amid expectations the Federal Reserve will temper its tightening path. The 10-year Treasury yield fell eight basis points and a gauge of the dollar declined.

As detailed yesterday, as if the bank bailout bonanza, a larger than expected TLTRO repayment in Europe and China's RRR cuts weren't enough, traders are facing fresh turmoil by today’s $2.9 trillion options expiration after a week of bank drama. Such quad-witching days typically involve portfolio adjustments, spikes in volume and price swings, especially on day so near-record low liquidity such as these.

Financial stocks were lower in premarket trading Friday, in line with the broader market, as doubt persists around First Republic Bank despite a $30 billion rescue effort from large lenders and federal regulators. First Republic’s slide continues since market close Thursday, as the California bank discloses its borrowing from the Fed ranged from $20 billion to $109 billion in the last week while billionaire investor Bill Ackman warned the effort to rescue FRC was creating a “false sense of confidence" a remarkable U-turn from him begging for a bailout of SVB. First Republic Bank and PacWest Bancorp are among the most active financial stocks in early premarket trading, falling 11.9% and 4.7%, respectively.  FedEx Corp. shares jumped in premarket trading after the parcel company boosted its profit guidance, beating the average analyst estimate. Nvidia Corp. gained slightly as Morgan Stanley upgraded the biggest US chipmaker to overweight from equal-weight. Here are some other notable premarket movers:

• US Steel shares rise 5.6%, with analysts saying the company’s new first-quarter earnings guidance was much better than anticipated.
• Baidu shares rise 5% in US premarket trading after the Chinese search-engine operator’s newly debuted AI chatbot gained positive reviews from analysts. Other AI-exposed stocks are also higher in premarket trading, with C3.ai (AI US) +3%, BigBear.ai (BBAI US) +8.5%, SoundHound AI (SOUN US) +7.1%.
• Cryptocurrency-exposed stocks rose after Bitcoin extended its gains for a second consecutive session, rising back above the $26,000 threshold. Hive Blockchain (HIVE US) climbed 8.7%, Hut 8 Mining (HUT US) +5.8%, Marathon Digital (MARA US) +5.4%, Riot Platforms (RIOT US) +5.7%, Stronghold Digital (SDIG US) +5.1%.
• Keep an eye at FMC Corp. stock as it was upgraded to buy from neutral at Redburn, which cites “strong” pipeline-driven growth and an expected further increase in the crop chemical producer’s “industry- leading” margins.

Investors are recovering from a turbulent week that began with banking-sector concerns driving the VIX index of stock volatility to the highest since October and pushing the S&P 500 to the lowest in more than two months. Friday’s quarterly so-called triple witching — where contracts for index futures, equity index options and stock options all expire — could amp up swings in trading. The failure of Silicon Valley Bank prompted the US government to step in, and banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week.

While that demand for emergency liquidity shows continued caution, the overall rescue efforts have eased the risk of a broader banking-sector contagion, according to Richard Hunter, head of markets at Interactive Investor. “The generally swift and decisive actions which have been taken have removed some of the sting from market volatility,” he said.

“We do not expect a full-blown financial crisis, but one must not dismiss the underlying dynamics,” said Karsten Junius, the chief economist at Bank J Safra Sarasin AG. “Financial conditions will most likely tighten further and increase recession risks. We therefore advocate a defensive positioning with regard to risk assets and a tactically cautious stance on the banking sector, even though the constructive case for banks remains intact over the medium to longer term.”

Bank of America strategist Michael Hartnett said investors should sell any rally in stocks as fund flows don’t yet reflect deep enough concern about a looming recession. The strategist, who correctly warned of a stock exodus in 2022, recommended selling the S&P 500 above 4,100 points, about 3.5% above its last close.

The Stoxx Europe 600 index erased an advance with energy, miners and tech the best-performing sectors. A gauge of European banking stocks is heading for a drop of more than 9% this week as yet another early rally lost steam Friday. Shares in Credit Suisse resumed a decline, falling as much as 10% as the idea of a forced combination with a larger rival UBS Group AG was shot down. The stock had rallied almost 20% Thursday after the Swiss central bank stepped in with support. Bonds across Europe gained, with Germany’s 10-year yield down 10 basis points. Here are the most notable European movers:

• European mining stocks rebound from two sessions in the red, with copper, aluminum and steel-exposed names leading the bounce, and Glencore gaining 4.2% as of 10:32 a.m. CET
• European logistics and freight stocks gain, after US peer FedEx’s results beat expectations and it upgraded its forecast, sending its shares surging in postmarket trading
• Telenor shares rise as much as 3.2%, after a Financial Times report that CK Hutchison is in talks with the Nordic telecom operator about merging their operations in Denmark and Sweden
• Webuild shares rise as much as 8.1% to add to a 12% post-earnings jump in the prior session, with Akros raising the Italian construction firm to accumulate from neutral
• Nel shares gain as much as 6%, the most since Feb. 7, as Goldman Sachs raises the Norwegian electrolyzer firm to buy, from neutral, on an increasingly strong growth outlook
• Enel shares gain as much as 2.4% in early trading. The Italian utility’s FY net income is ahead of expectations, while guidance on its debt and dividend looks robust, analysts say
• LSE Group shares rise as much as 3% as UBS upgrades the exchange operator to buy from neutral, saying the risk-reward on the stock is “very favorable”
• Credit Suisse fell as investors examine its prospects after a central bank backstop. The firm and UBS are opposed to a forced combination, Bloomberg News reported

Earlier in the session, Asia stocks rebounded, led by Hong Kong-listed shares as risk appetite was helped by a rescue package for First Republic Bank. The MSCI Asia Pacific Index advanced as much as 1.6%, reversing Thursday’s drop. Hong Kong’s Hang Seng China Enterprises Index jumped more than 2%, leading indexes in the region, as Baidu drove China’s artificial intelligence stocks higher after brokers tested its ChatGPT-like service.  China’s central bank announced an unexpected cut to its reserve requirement ratio after domestic markets closed. Gains in Asia were broad-based with most markets in the green, after the biggest US lenders agreed to contribute $30 billion in deposits to First Republic. Bank stocks rose as jitters about the health of the US financial system and economy eased.  The MSCI Asia gauge was still on track for a second straight week of losses, albeit with smaller declines, as rolling headlines on troubled lenders from Silicon Valley Bank and Signature Bank to Credit Suisse Group AG led to choppy trading. The stock measure came close to entering correction territory prior to Friday’s rebound, with markets also digesting a 50-basis-point rate hike by the European Central Bank ahead of the Federal Reserve’s meeting next week. Shares in Taiwan, South Korea and the tech hardware sector “have over-delivered” this year and are looking particularly vulnerable to shockwaves from the US banking stress, according to Goldman Sachs Group

Japanese stocks rose, following US peers higher, as sentiment improved after Wall Street banks stepped in to rescue First Republic Bank.  The Topix Index rose 1.2% to 1,959.42 as of market close Tokyo time, while the Nikkei advanced 1.2% to 27,333.79. Sony Group Corp. contributed the most to the Topix Index gain, increasing 3.5%. Out of 2,159 stocks in the index, 1,567 rose and 509 fell, while 83 were unchanged. Japan equities were also buoyed by growth stocks, which “are outperforming value stocks today, especially tech stocks,” said Rina Oshimo, a senior strategist at Okasan Securities. Meanwhile, the European Central Bank went ahead with a planned half-point rate hike. “The reality of overseas banking problems is still unclear,” said Hajime Sakai, chief fund manager at Mito Securities. “While U.S. seems to be calming down, outlook in Europe remains uncertain.”

Key stock gauges in India advanced on Friday but registered their third weekly drop in four amid risk-off sentiment triggered by worries over global growth and future course of interest rates. The S&P BSE Sensex rose 0.6% to 57,989.90 in Mumbai, while the NSE Nifty 50 Index advanced 0.7% to 17,100.05. For the week, the Nifty 50 fell 1.8%, while the BSE Sensex declined 1.9%. Indian stocks have sharply underperformed Asian and emerging markets, both today and for the week, as investor concerns persist over the South Asian country’s relatively high valuations and slowing growth momentum. HDFC Bank contributed the most to Sensex’s gain, increasing 1.4%. Tata Consultancy Services was among the worst performing NIFTY IT stocks, and underperformed most of its listed Indian peers, as its CEO’s sudden resignation surprised investors.  Out of 30 shares in the Sensex index, 21 rose and 9 fell.

In FX, the Dollar Index is down 0.2% as the greenback falls versus all its G-10 rivals to head for a weekly. The New Zealand dollar and Australian dollar are the best performers. US overnight indexed swaps are now pricing for an 80% probability of a quarter-percentage point Fed rate hike next week, up from a coin toss earlier this week.

In rates, treasuries have recouped some of Thursday’s losses, led by bunds and gilts as euro-zone money markets trim rate-hike premium for May after Thursday’s post-ECB selloff. Intermediate sectors lead a limited advance for Treasuries as US stock futures hold most of Thursday’s steep gains. Two-year US yields fell 3bps to 4.11% while the 10-year rate slipped seven basis points to 3.49% vs Thursday’s close and paced by bunds and gilts. Fed-dated OIS contracts price around 20bp of rate-hike premium for next week’s policy decision, in line with Thursday’s close, while around 75bp of rate cuts are priced from May peak into year-end.

Oil headed for the biggest weekly decline this year after investor confidence plunged following the worst banking sector turmoil since the financial crisis. WTI futures in New York were down about 10% this week, even though they edged higher by 1.6% to trade near $69.40 to pare some of the decline. The failure of Silicon Valley Bank and troubles at Credit Suisse Group AG, compounded by oil options covering, triggered a three- day rout earlier this week that sent prices to the lowest in 15 months. Gold is headed for its biggest weekly gain since November after attracting haven demand due to banking turmoil in the US and Europe. U.S. Steel is among the most active resources stocks in premarket trading, gaining about 4%. 

Looking to the day ahead now, and data releases from the US include the University of Michigan’s consumer sentiment index for March, industrial production for February, and the Conference Board’s leading index for February. Over in Europe, we’ll get the final Euro Area CPI reading for February. Lastly, central bank speakers include the ECB’s Simkus.

Market Snapshot

• S&P 500 futures down 0.3% to 3,981
• STOXX Europe 600 up 1.0% to 446.26
• MXAP up 1.4% to 157.20
• MXAPJ up 1.5% to 506.60
• Nikkei up 1.2% to 27,333.79
• Topix up 1.2% to 1,959.42
• Hang Seng Index up 1.6% to 19,518.59
• Shanghai Composite up 0.7% to 3,250.55
• Sensex up 0.4% to 57,866.02
• Australia S&P/ASX 200 up 0.4% to 6,994.80
• Kospi up 0.7% to 2,395.69
• Brent Futures up 0.7% to $75.22/bbl
• Gold spot up 0.5% to $1,929.89
• U.S. Dollar Index down 0.33% to 104.07
• German 10Y yield little changed at 2.25%
• Euro up 0.4% to $1.0653
• Brent Futures up 0.7% to $75.22/bbl

Top Overnight News from Bloomberg

1. China cut the amount of cash banks must keep in reserve at the central bank in an effort to support lending and strengthen the economy’s recovery from pandemic restrictions and a property market slump: BBG
2. Central bank interest-rate hikes really started hitting home this week: BBG
3. Banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week, a sign of escalated funding strains in the aftermath of Silicon Valley Bank’s failure: BBG
4. If there’s one lesson from the European Central Bank’s latest monetary policy meeting, it’s that bond market volatility is here to stay: BBG
5. China's Xi Jinping will visit Moscow next week for talks with Russian President Vladimir Putin, showcasing the deepening ties between the countries. WSJ
6. TikTok said that the Biden administration was pushing the company’s Chinese owners to sell the app or face a possible ban. But there are probably few companies, in the tech industry or elsewhere, willing or able to buy it, analysts and experts say. NYT
7. ECB officials (including Muller, Simkus, and Kazimir) deliver hawkish comments, warning that rates still have further to go on the upside. BBG
8. Banks borrowed a combined $164.8 billion from two Fed facilities in the week ended March 15, a sign of escalated funding strains. Discount window borrowing shot up to $152.85 billion, eclipsing the prior all-time high of $111 billion in 2008. Another $11.9 billion was borrowed from the new emergency backstop launched Sunday known as the Bank Term Funding Program. BBG
9. The US is committed to replenishing the Strategic Petroleum Reserve but won’t rush to do so immediately despite the recent decline in oil prices, a top Biden administration official said. BBG
10. Poland will send four of its MiG fighter jets to Ukraine in the coming days in what amounts to the first shipment of combat aircraft to the Zelensky gov’t. FT  
11. Fresh turmoil for traders may be sparked by today's options expiration after a week of bank drama. An estimated $2.7 trillion of derivatives contracts tied to stocks and indexes will mature, typically involving portfolio adjustments, spikes in volume and price swings. Demand for bearish options has been on the rise and market makers will be "short gamma," requiring them to ride the prevailing trend. BBG
12. PacWest Corp is in talks about a liquidity boost with Atlas SP Partners and other investment firms. RTRS
13. Charles Schwab saw $8.8 billion in net outflows from its prime money market funds this week as investors rattled by turmoil at US banks plowed even more money into the brokerage’s other portfolios that favor assets with government backing. BBG

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were positive amid the improved global risk appetite after recent bank lifelines including the SNB liquidity backstop for Credit Suisse and with large US banks teaming up to deposit USD 30bln in First Republic Bank. ASX 200 was marginally higher with the index kept afloat amid outperformance in energy and as the top-weighted financial industry benefitted from the recent banking sector relief, although gains were limited by losses in real estate and the defensive sectors. Nikkei 225 made headway above the psychological 27,000 level with railway stocks among the top gainers, while automakers lagged at the opposite end of the spectrum. Hang Seng and Shanghai Comp. were in an upbeat mood as energy and tech spearhead the advances in Hong Kong and with Baidu eyeing double-digit percentage gains, while the mainland also benefitted from the PBoC’s continued liquidity efforts.

Top Asian News

• China Securities Journal noted that the Chinese economy requires more fiscal and monetary support, as well as reiterated that the economic rebound is not yet solid.
• Japan's government and BoJ will hold a meeting on Friday evening after the SVB collapse, with the MoF, FSA and BoJ poised to exchange information on financial markets, according to Nikkei.
• Japanese Finance Minister Suzuki said Japanese financial institutions have ample capital base and liquidity, while the financial system is stable as a whole. Suzuki added they are closely coordinating with the BoJ and other central banks regarding responding to financial situations.
• Japanese Union Rengo says overall wages to rise 3.8% in Spring wage talks.

European bourses are firmer across the board, Euro Stoxx 50 +0.4%, as recent liquidity action settles sentiment on Quad Witching Friday. Sectors, are all in the green with the defensively-inclined names lagging and upside in Basic Resources and Banking names, SX7P +0.4%; note, Credit Suisse has dropped into negative territory despite opening in the green. Stateside, futures are essentially unchanged having eased from initial best levels around the European open ahead of Michigan data and as attention turns to the upcoming FOMC.

Top European News

• UK Chancellor Hunt abandoned plans for sovereign wealth funds to pay corporation tax on property and commercial enterprises, according to FT.
• Negotiations for the UK's re-entry into the EU's Horizon research scheme may begin within weeks following a resolution, in principle, of the post-Brexit Northern Ireland dispute, according to BBC's Parker.
• German Chancellor Scholz said he does not see the threat of a new financial crisis and the monetary system is no longer as fragile as it was before the financial crisis, according to Handelsblatt. It was also reported that Germany's Economy Ministry said a technical recession can now no longer be ruled out.

FX

• The USD is subdued, though has convincingly reclaimed the 104.00 mark after dropping to a 103.89 low earlier; action which comes to the benefit of G10 peers.
• Antipodeans are the stand-out outperformers given their high-beta status amid the improvement in risk appetite, though NZD/USD peaked above 0.6250 and AUD/USD failed to surpass the 0.6720 21-DMA convincingly.
• Other G10s are deriving upside, though magnitudes slightly less pronounced, with USD/JPY holding above 133.00, Cable above 1.21 and EUR around 1.0650.
• Yuan saw some modest, but ultimately shortlived, pressure on the PBoC's 25bp cut while the Scandis are benefitting from risk, though the SEK less so given unfavourable unemployment data.
• PBoC set USD/CNY mid-point at 6.9052 vs exp. 6.9017 (prev. 6.9149).

Fixed Income

• EGBs are markedly more contained thus far, though Bunds have still posted a +100tick range and are currently holding near 136.40 with the 10yr yield around 2.25%.
• EGBs have largely disregarded numerous ECB speakers, who overall have added little, and the final EZ HICP reading for February while Gilts are following suit given a lack of specific drivers ahead of next week's BoE.
• Stateside, the direction and magnitude of price action is in-fitting with the above though the US yield curve is slightly mixed with the short-end a touch firmer and the long-end end dipping slightly.

Commodities

• Commodities are, generally, deriving support from the firmer risk tone and as the USD remains under pressure; with the crude benchmarks choppy but most recently extending to incremental session highs.
• Albeit, this upside places WTI Apr'23 just USD 0.30/bbl above USD 69.00/bbl and as such well within the week's USD 65.65-77.47/bbl parameters.
• Spot gold is similarly bid and at the top-end of USD 1918-1934/oz ranges, with base metals benefitting from the improved tone though the complex is still in the red for the week.
• OPEC+ delegates are reportedly still encouraged by Asian demand; Delegates largely blame the recent sell-off on speculative money leaving the derivatives oil market rather than weakness in the physical market, according to Bloomberg.
• US energy envoy Hochstein said US President Biden is committed to replenishing the petroleum reserve.
• China to lower retail fuel prices from Saturday, according to NDRC.
• Increasing oil demand from China has lifted shipping costs markedly, via WSJ; highlighting that the daily chartering cost for VLCC has roughly doubled MM.
• Russia's Kremlin said Russia is extending the Black Sea grain deal for 60 days.
• China is reportedly mulling efforts to maintain iron ore supply and prices, according to NDRC; warn iron ore trading firms to avoid hoarding and price gouging.

Geopolitics

• North Korea said its missile launch on Thursday was a Hwasong-17 ICBM which sent a warning to enemies and proved the capability to respond overwhelmingly if needed. North Korea added its launch was a response to US-South Korea military drills and its leader Kim called for boosting deterrence of nuclear war, while it noted the launch did not have any negative impact on the safety of neighbouring countries, according to NK News and KCNA.
• Chinese President Xi is to visit Moscow on March 20-22, according to state media; Both presidents are set to sign "important documents", and discuss strategic partnership, according to Tass.
• Russia's Kremlin said President Putin and President Xi will meet on March 20th, hold negotiations on March 21st, and there will be a press statement.
• German Federal Education/Research minister is to visit Taipei, Taiwan on Tuesday, via FT citing sources; Foreign Minister Baerbock intends to visit Beijing, China in April/May.

US Event Calendar

• 09:15: Feb. Industrial Production MoM, est. 0.2%, prior 0%
  • Feb. Manufacturing (SIC) Production, est. -0.3%, prior 1.0%
  • Feb. Capacity Utilization, est. 78.4%, prior 78.3%
• 10:00: March U. of Mich. Expectations, est. 64.8, prior 64.7; Current Conditions, est. 70.5, Sentiment, est. 67.0,
  • U. of Mich. 1 Yr Inflation, est. 4.1%, prior 4.1%
  • U. of Mich. 5-10 Yr Inflation, est. 2.9%, prior 2.9%
• 10:00: Feb. Leading Index, est. -0.3%, prior -0.3%

DB's Jim Reid concludes the overnight wrap

Some optimism has returned to markets over the last 24 hours, with bank stocks stabilising on both sides of the Atlantic and 2yr yields surging back. Even the ECB’s decision to pursue a 50bp hike went without incident, and investors grew in confidence that the Fed would follow up with their own 25bps hike next week, so we’re starting to see a modest change in the mood music. It's also telling this morning that in Asia, US yields and equity futures are fairly stable. Well, they were at the time of typing.

As we'll see below, the concerns haven't gone away though, as while Credit Suisse saw its equity price increase, its bonds/CDS were generally flat to weaker. Let's start with the US banks as there was a lot of news surrounding First Republic Bank. The equity opened down a further -12% taking it to its lowest levels since going public, before recovering slowly as reports started filtering out about additional capital injections. Following numerous reports early yesterday that the US government was trying to agree to a rescue package with some of the major US banks, a deal was announced just before the US equity market closed. In a joint statement the consortium of banks including JPMorgan, Citigroup, Bank of America and Wells Fargo tried to reassure the public that their actions, “reflects their confidence in First Republic and in banks of all sizes.” Overall 11 banks are contributing $30bn of uninsured deposits to First Republic, with $5bn coming from JPMorgan, Citigroup, Bank of America and Wells Fargo. The banks' commitment will extend for 120 days initially and could be extended at that point as necessary. In after-hours trading, First Republic's shares fell c.-17% as the bank announced that it was suspending its dividend and plans to trim its debt burden. That leaves the stock nearer to where it was trading prior to the news of the deposit injection but still higher.

In terms of bank funding, last night the Fed released the weekly data of how its various lending facilities were used in the week ending March 15. The most anticipated release of the data since Covid did not disappoint in scale. In total, there was $164.8bn of borrowing between the Fed’s discount window ($152.85bn) and the Bank Term Funding Program ($11.9bn) that the Fed announced last week. The discount window figure blows away the previous high of $111bn during the 2008 financial crisis. However, as a function of overall deposits level yesterday’s data was about 1% of deposits, while at the height of the GFC the discount window usage in a week was as much as 1.8% of deposits. This data will be parsed more in coming weeks if stress persists but the 11 bank consortium into First Republic will be hoped to be enough to prevent that.

Nevertheless, we shouldn’t get ahead of ourselves, and it’s worth remembering that we’ve already had a temporary period of stability on Tuesday that was then dented by the Credit Suisse worries on Wednesday. Indeed, their bonds stayed fairly stressed yesterday even with the market bounceback. The 5yr credit default swaps stayed around the +1000 level, whilst there were further declines in the value of their debt – notably their ’29 EUR bonds are trading under €70. That was in spite of the announcement we highlighted yesterday that they’d be using a SNB liquidity facility, which initially saw the share price surge +40% at the open, before paring back around half those gains to “only” close up +19.15%.

With regard to Credit Suisse, if you’re looking for the positives in European banking see my CoTD here yesterday that shows the rest of the sector is more tightly packed together in 5yr CDS terms and that CS has been an outlier for months. So if the authorities manage to contain it, the immediate contagion risk is limited. However, the CoTD also highlights how we think the financial risk will eventually spread to corporates. If relatively lowly levered financials can get hit then highly levered corporates won’t be immune further down the line with the appropriate lag. Our YE targets for US and EU HY for YE 2023 have been around 860bp for 12 months now, but with most of the pain expected to occur in H2 2023. Our US Lev Loan target is +1000bp for the same time period. If you're not on my CoTD (chart of the day), send an email to jim-reid.thematicresearch@db.com to get added.

Banks in aggregate recovered a bit yesterday, though the CS fallout continued to weigh as Europe’s STOXX Banks was up just +1.16% vs the -8.40% the day before. Meanwhile, the news of the further First Republic support saw the KBW Banks index up +2.57% - roughly 1.4% of that came after news hit that First Republic would get $30bn of deposits. We shouldn’t forget that both are still down more than -10% over the week as a whole, but the more positive tone supported a broader equity rally that left the S&P 500 (+1.76%) and Europe’s STOXX 600 (+1.19%) with solid performances on the day. That’s the best day for the S&P 500 in over 2 months and is entering today up +2.56% through the last four days, while the STOXX 600 is down -2.67% on the week so far.

Whilst all that was going on, the ECB followed through on their previous commitment to hike by 50bps at yesterday’s meeting, which takes the deposit rate up to a post-2008 high of 3%. President Lagarde said this was supported by a “large majority”, but in other respects the decision was a dovish one, and their statement dropped the previous guidance that they expected to raise rates further. Instead, the message was that they’d take a “data-dependent” approach at subsequent meetings, and there wasn’t much indication about what they were planning to do next. Their inflation forecasts (which were finalised before the current turmoil) were also revised down on the back of lower energy prices, and now see inflation falling from +5.3% in 2023 to +2.9% in 2024 and +2.1% in 2025. On the other hand, the core inflation forecast for 2023 was revised up to +4.6%, which shows that they still see underlying price pressures staying resilient.

When it came to the current turmoil, the ECB’s statement said that they were “monitoring current market tensions closely”, and it also affirmed that the “euro area banking sector is resilient, with strong capital and liquidity positions.” President Lagarde went on to deflect comparisons to 2008, saying that “the banking sector is in a much, much stronger position”. Looking forward, our European economists maintain their 3.75% baseline terminal rate call based around a 50bp hike in May and then 25bps in June. That view is predicated on the relatively rapid normalisation of the current global financial shock. Please see their report here for more.

With the ECB hike now delivered, there was a growing expectation among investors that the Fed would similarly follow through with a hike at their own meeting on Wednesday. Futures are now pricing in a +19.2bps move, which is a decent increase from the +11.8bps priced by the previous day’s close. In turn, that confidence led to a rebound in shorter-dated yields, with the 2yr yield up +27.0bps to 4.157%, and the 10yr yield also recovered +12.2bps to 3.577% although it is slightly lower (-2.26bps) in Asia as we go to press. In Europe it was much the same story, with yields on 10yr bunds (+16.0bps), OATs (+13.5bps) and gilts (+10.4bps) all rising. Another key factor behind that was growing scepticism that central banks were about to pursue substantial rate cuts this year. For instance, the futures-implied rate for the Fed’s December meeting rose by +40.7bps on the day to 4.097%, which demonstrates how rate cuts are starting to be priced out again.

The latest data has been far down the agenda lately, but the weekly initial jobless claims from the US for the week ending March 11 came in at 192k (vs. 205k expected). That’s a -20k decline on last week, which had seen the biggest weekly increase since September. Otherwise, the US housing data was more resilient than anticipated in February, with housing starts up by an annualised rate of 1.450m (vs. 1.310m expected), and building permits up by 1.524m (vs. 1.343m expected).

Asian equity markets are higher overnight. As I type, Chinese stocks are advancing with the Hang Seng (+1.85%) emerging as the top performer across the region while the Shanghai Composite (+1.58%) and the CSI (+1.57%) are also sharply higher. Elsewhere, the Nikkei (+1.20%) and the KOSPI (+0.67%) are also trading in the green as risk sentiment improved after the turmoil in the US and European banking sector eased. Outside of Asia, US stock futures are trading flattish with those on the S&P 500 (+0.06%) and NASDAQ 100 (+0.12%) taking a bit of a breather after a hectic week.

In the energy markets, oil prices are slightly higher this morning with Brent futures (+1.04%) trading at $75.48/bbl and WTI (+1.05%) at $69.07/bbl amid positive market sentiment as well as strong China demand expectations.

To the day ahead now, and data releases from the US include the University of Michigan’s consumer sentiment index for March, industrial production for February, and the Conference Board’s leading index for February. Over in Europe, we’ll get the final Euro Area CPI reading for February. Lastly, central bank speakers include the ECB’s Simkus.