A significant decline in US stocks on Friday, March 17th, triggered concerns among investors, as First Republic and Credit Suisse required significant financial assistance. The Fed and other central banks have coordinated a move to ease financial strains, which could prompt the Fed to pause interest-rate increases.
Banking Sector and Market Volatility
First Republic and Credit Suisse faced significant challenges on March 17th, leading to plummeting stock prices and the suspension of dividends for First Republic. The Swiss central bank provided Credit Suisse with more than $50 billion in financial aid, yet its stock still fell 8%. The collapse of these banks, along with three US lenders, led analysts to reconsider the 50 basis-point hike proposed earlier in the month by Chair Jerome Powell. Despite these issues, the S&P 500 and Nasdaq logged weekly gains, while the Dow slipped.
Fed Pausing Rate Hike
The Fed and five other central banks announced a coordinated move to increase the frequency of access to US dollar swap arrangements from weekly to daily to boost liquidity. While US stock futures and Treasury yields initially climbed in response, several analysts have concluded that a pause in the interest-rate hike would be more favorable given the current risk-benefit calculations. This global coordination to rescue institutions and maintain liquidity suggests that stabilizing the liquidity in the banking system is the Fed's primary focus.
Implications for Investors
The decision to pause or hike the interest rate remains challenging, with analysts indicating that the chances of a pause seem to have increased following the coordinated global move. Market volatility could influence the Fed's decision on interest rates, as they have signaled their intention to continue rate hikes to keep up the fight against inflation. Investors can expect the Fed to focus on price stability while using liquidity instruments or buffers to stabilize the liquidity situation in the market.
Outlook for European Markets for Monday
European stocks are set for a lower start on Monday after Stoxx 600 saw its worst week since September 2022. Investors are mulling over the news that UBS has agreed to buy Credit Suisse for 3 billion Swiss francs ($3.2 billion) Sunday. The combined bank will have a staggering $5 trillion of assets, according to UBS. Pre-market trading of Credit Suisse shares is already looking grim.
According to a report by Reuters at 8:14 a.m. CET, Credit Suisse's shares had plummeted by 61.95% in pre-market trading, as reported by private bank Julius Baer. The drop in shares came after news of the bank's takeover by UBS. Meanwhile, UBS Group shares saw a decline of 7.1%. Credit Suisse still has until the Swiss market opens at 9:00 a.m. CET to halt trading in its shares, but it has not yet done so. Over the weekend, the Swiss National Bank expressed its satisfaction with the deal, stating that the takeover of Credit Suisse by UBS was a solution to ensure financial stability and protect the Swiss economy in this exceptional situation.
Outlook for US Markets for Monday
The US market on Monday, March 20th, is expected to be volatile due to the recent financial crisis in the banking sector. The decline in US stocks on Friday triggered concerns among investors, and the Fed's coordinated move with other central banks to ease financial strains could prompt a pause in interest-rate increases. The focus of the Fed is now on stabilizing liquidity in the banking system, and the decision to pause or hike the interest rate remains challenging. Market volatility could influence the Fed's decision on interest rates, and investors can expect the Fed to focus on price stability while using liquidity instruments or buffers to stabilize the liquidity situation in the market. I
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