The week ahead
March 20, 2023
Good Morning and welcome to another week in the markets.
Yesterday disaster was averted as UBS agreed to buy Credit Suisse in a historic, government-brokered deal aimed at containing a crisis of confidence that had started to spread across global financial markets.
The Swiss bank is paying 3 billion francs ($3.2 billion) for its rival in an all-share deal that includes extensive government guarantees and liquidity provisions.
The price per share marked a 99% decline from Credit Suisse’s peak in 2007.
The Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over. Regulator Finma said about 16 billion francs of Credit Suisse bonds, known as AT1s, will become worthless to ensure private investors help shoulder the costs.
Despite this result, and every government and every central bank stepping in to provide liquidity, reassurance and help, the markets have fallen again this morning. Confidence is easily lost, but not so easily regained.
HSBC fell as much as 6.6% in Hong Kong trading overnight, the biggest drop in nearly six months, with its newly issued AT1 bond declining more than 5 cents. Standard Chartered Plc slid as much as 5.6%.
The complete write-down of Credit Suisse’s AT1 debt as part of a Swiss bailout has investors in the $275 billion market scrambling to determine how much protection the notes offer in a crisis. The repercussions can be twofold, with banks such as HSBC potentially needing to find new sources of capital if there’s a loss of confidence while their holdings of such debt issued by peers may see a significant loss of value.
Now that liquidity has been all but guaranteed, we had hoped that this week would be one of calm, or more accurately less panic, returning to the markets. It might take a little longer, but we’re still confident that it will.
Aside from banks, this week begins with a Chinese state visit to Russia by President Xi Jinping, reaffirming his ties with his Russian counterpart Vladimir Putin during a three-day trip. China has presented itself as a potential mediator in the Ukraine conflict, although this is viewed with scepticism in Europe and the US. This is Xi’s first visit to Russia since the war began in February last year.
At home here in the UK, progress is being made in ending the long-running labour disputes. The meetings here are about finding resolutions. Also, RMT members will on Monday conclude a ballot to accept Network Rail’s revised offer on pay and conditions. But the picture is complicated. For instance, about 70,000 members of the University and College Union will resume strike action on Monday despite their employers’ offer of new proposals on pay, conditions and pensions.
Things are more complicated still across the Channel for Emmanuel Macron, where further strike action over his pension reforms may be the least of his worries, given the vote of no confidence his party faces on Monday.
British trade negotiators are heading to New Delhi for an eighth round of talks to secure a UK-India Free Trade Agreement; fingers crossed.
Central Bank decisions:
The Federal Reserve gets top billing in the economic news with its monthly rate-setting committee announcing its monetary policy adjustment on Wednesday.
Despite the trauma of this month’s banking sector crises, which some argue should warrant a pause in rate movements, the markets are expecting a 25 basis point rate increase. This would certainly please the OECD.
The Bank of England rate decision follows on Thursday. Economists are split over what the Monetary Policy Committee should do with the markets pricing in an almost equally split probability of a 25-percentage-point increase or no change. Expectations that the MPC might stick with the base rate at 4 per cent were bolstered by last week’s public expectations on inflation survey results.
Nike reports on Tuesday. They have been suffering recently due to their significant reliance on China at a time when this is less politically acceptable in the US. Analysts expect earnings per share of $0.54 on revenues of $11.46bn for Nike’s quarter, which ended in February, and will be keen to see what success the company has had reducing its significant inventory pile.
Things are looking up (a bit) for Tencent with analysts forecasting mild revenue growth (less than 1 per cent) in its fourth-quarter results. This would end two consecutive quarters of revenue decline, although it will probably still illustrate the negative impact of China’s zero-Covid policy, which ended in December.
§ France, Germany, UK: quarterly changes to local equity indices come into force, including the FTSE 100, DAX and CAC
§ Germany, February producer price index (PPI) inflation rate data
§ UK, Rightmove House Price Index
§ Results: Computacenter FY, Foot Locker Q4
§ Canada, February CPI inflation rate data
§ France, February retail sales figures
§ Germany, March Zew economic sentiment survey
§ US, existing home sales data
§ Results: Alliance Pharma FY, Boku FY, Henry Boot FY, JBS Q4, Kingfisher FY, Luceco FY, Nike Q3, Oxford Nanopore FY, RWE FY, Trustpilot FY, YouGov H1
§ UK, Consumer Price Index
§ US, Federal Open Market Committee decision on interest rates
§ Results: Essentra FY, Fever-Tree Drinks FY, Hostelworld FY, Tencent Q4, Ten Entertainment Group FY, Vistry Group FY
§ EU, March consumer confidence figures
§ UK, Bank of England’s Monetary Policy Committee rate decision
§ Results: Accenture Q2, Darden Restaurants Q3, General Mills Q3, Inchcape FY, Lloyd’s of London FY, Pirelli FY, Wickes FY
§ EU, France, Germany, Italy, Japan, UK, US PMI data
§ Japan, February CPI inflation rate data
§ UK, February retail sales figures
§ Results: Ceres Power FY, JD Wetherspoon H1, Smiths Group H1
Our market bias at the moment:
Many of our traders are now on the BUY side of the market.
After a large proportion of our strategies correctly called the initial market sell off, we witnessed an evolution across the board from SELL, to FLAT, to BUY.
In fact, we have witnessed some heavy buying as the markets have fallen, looking for value in global stock markets.
Buying into a fast falling market is like trying to catch a falling knife. It's tricky and you can take a little further short term pain, but over the mid term- it tends to be a prudent strategy.
Sentiment will change, and if it changes before the end of Q1, it will be quite the start to the year for many of our strategies.
Despite the sell off FTSE Mkt Trader is still positive by 7.5% in 2023. If they time the reversal correctly- they'll be looking at a very solid Q1 indeed.
Whether global markets bounce back this year, or trade in a range- our traders are tasked with achieving a minimum of 2 x their market benchmark per annum.
If you currently have an underperforming portfolio elsewhere, or are holding cash whilst waiting for an entry point- contact our team for a FREE market consultation.
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- London Stock Exchange 2020