The orchestrated takeover of Credit Suisse by UBS was a historic event for Switzerland, which will continue to have an impact for some years to come and which, in addition to UBS, is likely to keep the authorities and some lawyers busy for the foreseeable future. Whether the newly created giant will have to undergo a forced diet in the foreseeable future will soon become clear. Meanwhile, in the USA, a crisis has emerged in the regional banking market. Silicon Valley Bank (SVB) suffered from strong cash outflows due to its strong focus on business clients from the technology sector and also failed to keep the maturity matching of its own balance sheet under control. Due to rising interest rates, the investment portfolio lost significant value and had to be sold at substantially lower market prices because of the cash outflows and the sales that became necessary as a result, which resulted in considerable losses. The bank had to be wound down under state supervision. The Signature Bank of New York was also wound down. These regional banks thus seem to be the first, at least obviously recognisable, victims of the very rapid tightening of interest rate policy in the USA. Another crack can be seen in commercial business properties in the USA, especially office properties - here the vacancy rate has been rising significantly and continuously since the pandemic - listed Real Estate Investment Trusts (REITs) are also declining significantly. US regional banks are the main lenders in this segment (see FOCUS). On the surface, the economic data still make a reasonable impression and convey the picture of a still robust economy. However, in addition to the market-based factors, which paint a completely different picture, there are also signs of a slowdown in the US labour market. Nearly one-fifth of all US states have seen a significant increase in initial claims for unemployment benefits (i.e. claims up 25% from the previous year). Such an increase is consistent with an imminent recession and is also consistent with the much-discussed inverse interest rate structure in the bond market. A recession would be convenient for the central banks. The only way to successfully combat high inflation is to bring about an economic collapse. A fact that the central banks do not like to address directly.
Markets suffered only temporarily in March from the staggering banks. In view of the uncertainty, however, prices fluctuated significantly. The rather pessimistic investor sentiment and the simultaneously subsiding headlines surrounding the regional banks ensured a friendly mood at the end of the month in the last trading week. Hopes that the banking crisis would lead to a deviation from the central banks' tight monetary policy supported growth stocks. The US Federal Reserve's renewed interest rate hike also failed to bring about a sustained turnaround in the markets, although it caused a very weak trading day when it was announced. The low takeover price of USD 3.25 billion that UBS had to pay for Credit Suisse was a topic of conversation. The holders of the deeply subordinated "Additional Tier 1" (AT1) convertible bonds have to deal with a total loss of around CHF 16 billion francs. Credit Suisse is thus the first systemically important bank since the global financial crisis where AT1 creditors have been wiped out in the form of a going concern solution.
The bond markets reacted clearly to the banking crisis. Safe government bonds were in demand again and yields lost between 30 and 40 basis points. Extreme swings at the short end of the interest rate landscape were only rarely observed. The yield on 2-year Swiss Confederation bonds fell from over 1.6% to below 0.9% and recovered towards 1. 2% in the aftermath. Interest rate bets are now very explicit - interest rate cuts are already being priced in from September. The chances of a final rate hike in May are still 50%. The inversion of the yield curve, which has now lasted for months, has been pointing to a possible imminent recession for some time. A subsequent sharp steepening of this structure brings the recession risk into the immediate present, with market expectations that central banks would have to loosen the reins again.
Gold benefited from its safe haven status in the wake of the uncertainty surrounding the banking collapses and received a boost from the interest rate expectations described above. The price of an ounce of gold climbed by almost 8% and at times reached the psychological $2,000 mark. The economically sensitive oil price Brent lost around 3.6%. The USD index fell by 2.3%.
The problems at banks that came to light in March confirm our less optimistic assessment of further economic development. The rapid rise in interest rates is slowing down growth and industries that rely heavily on cheap financing are suffering from this pressure. The banking crisis will presumably cause a massive slowdown in lending in the months to come. We doubt whether the regional banks and the weakness in the commercial property market will be the first and last segments of the economy to suffer. As explained at the beginning, we are seeing the first signs of a weakening US labour market under the surface. The US consumer is important to the global economy and sets the pace for the future. As long as equity market valuations do not catch up with reality, we continue to maintain our cautious positioning. Bonds are already anticipating a more pessimistic outlook.