Swiss squeeze

A good week for

• Gold gained over 5% in US dollar terms
• Bonds rallied further, led higher by UK gilts, which rose over 2.5%

A bad week for

• Oil slipped 12% in US dollar terms
• Non-US equities weakened in sterling terms, with the UK the worst performer (-5%)

Banks

For a second week, banks have been in focus. Days after Silicon Valley Bank (SVB) failed, Credit Suisse also faced liquidity problems. The Swiss bank has faced a number of scandals and significant losses and recently announced that it had found “material weaknesses” in its financial reporting controls. Following this, a representative of the bank’s largest shareholder, the Saudi National Bank confirmed that it would not provide the firm with more capital if requested. While this likely referred to rules on percentage ownership and governance, this sparked alarm and sent the share price tumbling further. Soon after, the Swiss National Bank intervened with a CHF54bn loan to bolster the bank’s liquidity. By Sunday evening, the Swiss government had arranged for UBS, a rival Swiss bank, to take over the bank for £3.25bn. To help UBS execute the deal, the Swiss National Bank has provided CHF100bn of liquidity assistance and the Swiss Government has provided CHF9bn of guarantees against potential losses on Credit Suisse’s assets.

European monetary policy

Against this backdrop, the European Central Bank (ECB) met to set monetary policy. As expected, the ECB went ahead with a planned rate rise, increasing policy rates by 0.5%. However, instead of guiding towards further rate hikes, the policy statement removed any mention of the expectation of further tightening, and instead indicated a data-dependant approach. In reference to challenges faced by Credit Suisse, the ECB said it was “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability”. The bank emphasised the strong capital and liquidity positions of the Eurozone banking sector and that, if needed, its “policy toolkit is fully equipped to provide liquidity support to the euro area financial system”.

UK budget

Closer to home, the Spring Budget was in the spotlight, with more new spending announced than economists had expected. Spending in the coming fiscal year will rise by £22bn, with c. £10bn of extra spending in 2027-8. £4.3bn went on extending energy bill support, including extending the Energy Price Guarantee at the current level of £2,500 for three months and a further £4.8bn was spent on freezing fuel duty. The super-deduction on corporate investment was reduced from 130% to 100% but extended for a further three years, at a cost of c. £9bn per year, while a range of measures were announced to boost labour participation. In total, these labour measures, designed to encourage new parents, people with disabilities and older workers into work, add up to £7bn per year by 2027-8. These spending announcements used up a significant amount of the headroom the Chancellor has for further spending. While the Office for Budget Responsibility upgraded its GDP forecasts significantly, making it easier to meet the fiscal rules on borrowing, the £6.5bn remaining could be easily wiped out by even modest rises in bond yields. Nonetheless, the government will likely wish to announce new spending measures ahead of the 2024 election.

US financial conditions

The US Federal Reserve (Fed) stepped up liquidity provisions in order to support banks. The Fed pledged additional funding to eligible deposit-taking banks in case depositors wished to withdraw their funds via a new scheme called the Bank Term Funding Program (BTFP). Weekly data showed that, while the Fed’s new BTFP facility lent only $12bn by Wednesday, its discount window lending scheme (which allows banks to value collateral at par) had risen by $153bn, a record high. An additional $143bn of credit extensions appear on the balance sheet, which may have gone to help SVB and another bank, Silvergate, giving an idea of the degree of capital flight these banks may have been experiencing. All in all, $328bn of emergency loans meant that reserve balances increased by $440bn, effectively reversing all of the Quantitative Tightening achieved via balance sheet reduction. However, bank credit conditions are likely to tighten herein, which is likely to weigh on the economy. Futures markets continue to expect the Fed to raise rates at this week’s monetary policy meeting but, further out, cuts are now expected, reflecting weaker financial market conditions.

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