It was another volatile week for both equity and bond markets last week as ongoing headlines in both the European and US banking sectors and central bank policy actions dominated sentiment. Despite a slew of market moving headlines global equity markets finished the week with gains of on average of 0.8%, with the growth focused NASDAQ outperforming with a gain of 1.2% supported by the recent move lower in bond yields.
While headlines from the banking sector continued to dominate news flow, the overall resilience of markets was impressive, particularly when taking into account the news over the previous weekend of the essential bail-out of Credit Suisse by its largest Swiss rival UBS, and especially given the dramatic and controversial move by the Swiss Financial Regulator to wipe out the Additional Tier 1 bond holders in Credit Suisse ahead of the common equity holders in the bank’s capital structure.
This move initially sent shockwaves through the European banking sector, however clarification from both the European Banking Authority and the ECB that in the event of a Credit Suisse type of situation occurring with a European bank, that common equity
holders would continue to be first line of capital to bear any losses, helped stabilise not only the equity of listed European banks, but also broader markets. Also helping ease concerns at the start of the week was the move, orchestrated by the US Treasury, which saw a number of banks including JPMorgan Chase and Bank of America place a combined $30bn on deposit with the troubled regional bank First Republic Bank, while US Treasury Secretary Yellen hinted that a possible blanket guarantee could be considered for all US bank deposits.
During the middle of the week there were conflicting headlines in respect of this concept of a full deposit guarantee with Fed Chair Powell commenting that all US deposits are safe, to Treasury Secretary Yellen saying that the idea of a blanket guarantee without the approval of Congress had not been discussed, only to row back on this comment the following day.
What the above highlights is the sensitivity of markets to any signs of distress within the banking system and as we highlighted in last week’s Trader comment, how sentiment towards a sector that is for the most part exceptionally well capitalized and has none of the property exposure and leverage excess of 2007/2008, can change as a result of difficulties with a small number of banks, which in the case of the US regional banks would not be considered of systemic importance.