Week of February 20, 2023

The two U.S. banks that failed just over a week ago continue to send fear through the U.S. and global financial markets. The U.S. stock markets struggled again last week, while last Friday alone the Dow declined 1.2% while the S&P 500 sped 1.1%.  The tech-heavy NASDAQ dropped 0.7%.

Credit Suisse’s 167-year run came to an end after a collapse in the value of its shares and bonds last week.  Economists, investors and banking authorities worried that a collapse by Credit Suisse could ignite contagion fears in the global banking system after the failure Silicon Valley Bank.  On Sunday, Switzerland’s largest bank, USB, agreed to buy Credit Suisse in an emergency rescue deal paying $3.25 billion, about 60% less than the bank was worth when the markets closed last Friday, aimed at stemming panic in the financial markets. The Swiss National Bank said in a statement that the rescue would “secure financial stability and protect the Swiss economy.”

As a result of the two failing U.S. banks, and fear growing about the banking sector, federal-futures traders have abandoned expectations for a 50-basis-point rate hike in the Federal Reserve’s benchmark interest rate when the Fed completes their two-day meeting on Wednesday, March 23. At the end of last week, traders saw a nearly 75% chance of a 25-basis point rate hike, and roughly a 25% chance that the Fed would hold interest rates unchanged.

“Concerns that aggressive monetary policy had a significant impact on the economy, banking business and human behavior, in general, cannot be overlooked and is not seen in balance sheets yet. From that perspective, uncertainty could remain high for quite some time, even if recent bank support measures succeed,” said Stephen Innes, managing partner at SPI Asset Management.