- Fears of wider market contagion recede – for now.
- The Swiss National Bank provides a US$54bn lifeline for Credit Suisse. Other support measures announced.
- ECB hikes rates but refrains from providing future policy guidance.
Markets have taken a pause from a recent sell-off following last week’s collapse of Silicon
Valley Bank and Signature Bank.
The collapse had led to a steep decline in the shares of banks and other financial institutions and raised fears of a wider market contagion last seen in the global financial crisis of 2007-2008.
Shares in Swiss lender Credit Suisse plummeted earlier in the week, falling as much as 30% before a US$54bn lifeline from the Swiss National Bank reassured investors.
In the US, First Republic Bank’s benefited from co-ordinated action from Wall Street in a Treasury-brokered deal that saw a coalition of banks deposit $30bn.
Markets responded positively to developments, with both the DAX and the FTSE 100 posting gains in early morning trading on the 17 March. The S&P 500 gained 1.64% at the previous day’s close in a reverse of recent losses.¹
Against this backdrop, the ECB stuck to its expected 50bps rate hike bringing its deposit rate to 3%. However, it refrained from providing guidance on the future path of monetary policy. President Lagarde emphasised recent market stress and said this made it difficult to comment on the road ahead.
Dynamics of a crisis
Silvia Dall’Angelo, Chief Economist, Federated Hermes, noted that recent developments have offered a glimpse into the dynamics of a crisis. “They showed how stress starting at the periphery of the banking system and affecting non-systemic players can spread quickly to bigger institutions and across regions, as fear abruptly erodes confidence, notably around the weakest links,” she said. “Credit Suisse’s troubles have been known for some time and this week’s drama appeared to be mainly driven by fear itself rather than a change in fundamentals.”
Federated Hermes fixed income manager Orla Garvey highlighted the difficult situation central banks now face. “Headline inflation is uncomfortably above target, core inflation is proving sticky and now there are financial stability risks to contend with,” she said. “In that respect, the ECB’s response was an interesting test case. Eurozone growth and inflation have surprised to the upside consistently this year and the ECBs staff forecasts still has inflation above 2% until 2025.”
Dall’Angelo noted that despite the hiatus in volatility, market sentiment remains fragile. “At the very least, recent stress affecting the banking sector will leave a significant scar,” she said. “It’s now clear that there are several and often hidden pockets of vulnerability to higher rates in financial markets – several players had got used to operating in an environment of ultra-loose liquidity and are now struggling to cope with higher interest rates and tighter liquidity. The period of complacency is over. It’s now clear that the extraordinary monetary tightening of the last year is having a real impact on financial markets and the economy.”
1 Bloomberg, 17 March 2023.