Thousands of miles away from U.S. shores early Wednesday, a headline began working its way across Europe, then Wall Street, sparking fresh panic as it dawned on investors they may be facing yet another banking crisis.
In Zurich, shares of Credit Suisse
CS,
CSGN,
tumbled more than 20% at one point to a new record under €2 after the chairman of the Swiss lender’s top shareholder, the Saudi National Bank, said they won’t invest any more in the bank.
His comment sparked a sell off, spreading from European banks to U.S. stock index futures, leaving the Dow industrials
DJIA,
down over 500 points early Wednesday. The selling appeared to mark the end of a brief respite for markets following days of stress in the U.S. banking sector, triggered by the collapse of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, all within the space of a week.
Late Wednesday though major U.S. stock indexes trimmed earlier losses in the final hour of trading after Swiss authorities said in a statement that Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks, but the national bank will provide additional liquidity if necessary.
Wednesday night, Credit Suisse said it would borrow up to $54 billion from the Swiss central bank, calling it “decisive action” to calm investors.
And for U.S. investors who have had quite enough anxiety lately, a logical question would be to ask how a meltdown for a Swiss bank could damage their portfolios?
“I don’t think there are any direct consequences for U.S. investors, but it’s extremely negative for sentiment if a major Swiss bank fails, hot on the heels of SVB/SBNY,” Simone Ree, the founder of Tao of Trading options academy school and author of the book by the same name, told MarketWatch.
“The market will be (temporarily) wondering who’s next. It could start to have the optics of a global banking crisis, rather than an idiosyncratic failure of a niche US regional bank,” said Ree.
The Stoxx Europe 600 banking sector
SX7P,
tumbled 7%, with the heaviest regional losses focused on Switzerland, then bank-heavy countries of Spain and Italy. Among U.S.-listed banking shares, Credit Suisse stock
CS,
echoed the Zurich losses, while Deutsche Bank
DB,
fell nearly 10% and Banco Santander
SAN,
fell 9%.
Still, some would say the fact that Credit Suisse may be skating on thin ice is unsurprising. The Swiss bank has embarked on a revamp as it has seen five straight losing quarters, with a painful legacy that includes billions worth of exposure to the collapsed Archegos family office and being forced to freeze $10 billion worth of funds tied to Greensil Capital. The bank on Tuesday published its delayed annual report in which it admitted to financial control weaknesses
As for what could happen next, following the lifeline U.S. regulators on Sunday gave depositors of Silicon Valley Bank, Signature Bank and future troubled depositors, Credit Suisse may be lining up for its own bailout, say some.
“Despite Credit Suisse’s protests, it is looking inevitable that the Swiss National Bank (SNB) will have to intervene and provide a lifeline. The SNB and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial center,” said Otavio Marenzi, CEO of Opimas, a management consulting firm focused on global capital markets, in a note to clients.
Marenzi said Switzerland’s “reputation for financial stability and a safe haven for assets, so crucial for the country’s success in wealth and asset management, is already suffering incalculable damage,” he said.
And the plummeting share price of the bank and soaring yield on bonds is “mimicking Silicon Valley Bank’s recent collapse in a frightening way. In terms of the outflow of deposits, Credit Suisse’s position looks even worse,” said Marenzi.
One-year senior credit-default swaps on Credit Suisse, basically the cost of insuring the bank against near term default, surged from 835.9 basis points on Tuesday to an almost unheard of 1,200 basis points on Wednesday, Bloomberg reported, citing sources.
Among those who saw the Swiss bank’s headaches coming was Robert Kiyosaki, investor and the author of the 1997 bestseller “Rich Dad Poor Dad”, who told Business Insider on Tuesday that Credit Suisse’s high exposure to bond assets were a worry.
Over there?
Stephen Innes, managing partner at SPI Asset Management, told MarketWatch, that U.S. investors need to be watching the situation carefully.
If “SVB elicited the kind of reaction in the markets it did, CS has a much bigger footprint in global markets; hence I don’t think this a something investors could ringfence,” Innes said.
The bank could be “forced to sell down more securities to cover a likely run on large institutional deposits in light of what is going on in broader markets,” he said, adding that gold may be looking like a better hedge right now.
Fresh worries over Credit Suisse may have just crashed the party for Europe stocks and investors which have enjoyed a better performance than U.S. stocks. The Stoxx Europe 600 index
SXXP,
is up 2.8% year to date, versus a 0.7% gain for the S&P 500
SPX,
Better European economic data, easing energy prices, and the fact the region is more geared to China are reasons for the recent outperformance, say analysts at Morgan Stanley.
And as U.S. and global investors watch how Credit Suisse’s problems play out, they will also closely be watching the European Central Bank meeting on Thursday, where economists say market expectations for a half-point rate hike are no longer a sure thing.
Tao of Trading’s Ree said being a spectator to current banking stress isn’t the worst spot to be in right now. “There are times to add risk and times to manage risk. Today is a time to manage risk. I’m very content to be patient and watch how things evolve.”
“The SVB failure highlights the potential for other skeletons to be hidden in closets and the market will spend the next few weeks/months hunting them out. Even just the extreme volatility we’ve seen on bond markets the last 5 days renders any attempt to ascribe a value to other asset classes redundant,” he said.
Indeed, analysts are echoing this view, which is in part owing to increasing uncertainty around how the Federal Reserve will react going forward as it tries to balance market and economic risks. Some are now forecasting full percentage rate cuts by year-end, in wake of fallout for the banking sector.
Samantha LaDuc, the founder of LaDucTrading.com who specializes in timing major market inflections, said she stands by her advice (that she shared with MarketWatch in February) that investors are being “paid to wait,”by staying in cash.
Read: Looking for a place for your cash? Grab these 5% CDs while you still can.
“I have been literally recommending and tweeting to clients that we are PAID TO WAIT in T-bills at 5% until [the] bond market can figure out if we have recession or not. All that happened last week pulled forward recession risk,” she told MarketWatch.
As far back as November 2022, she’s been saying that she sees “unattractive risk-reward for either stocks or bonds.”
Opimas’ Marenzi said the threat to Wall Street from Credit Suisse was simple:
“You mean what do American investors who do not own any non-American stocks and do not own a passport and could not find Switzerland on a map and who think that anyone who speaks any language other than English is a bit weird have to worry about? Not a lot, other than the contagion spreading back into the US banking system and causing a meltdown,” he told MarketWatch.