Just as investors started to feel safe again, fears that Credit Suisse Group AG could be the next financial institution to go under had them running towards safe haven assets, strengthening the dollar.
Concerns that Credit Suisse Group AG might be the next bank to declare bankruptcy caused yesterday's global markets to experience volatility. A Saudi fund, the bank's largest shareholder, stated that it was unable to provide further capital, and the Swiss bank admitted before the Securities and Exchange Commission (SEC) that its losses for the last quarter of last year were larger than it had previously disclosed. Shares of Credit Suisse AG fell as much as 30% as market panic over systemic risks erupted, sending investors scrambling for safe haven assets. This brought back memories of the global financial crisis of 2008 and fueled speculation that central banks would be forced to tone down their aggressive stance to prevent a harder economic landing.
The US 10-year note fell 22 basis points and the German BUND by 27 basis points as a result of massive safe-haven treasury buying.
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The dollar strengthened as a safe haven against all currencies except the Japanese yen, which this time around also acted as a safe haven.
Almost the entire session, the European and American indices were under downward pressure as they tracked the performance of the Credit Suisse share and awaited news regarding the state of the Swiss financial institution.
Producer price indices (PPI) and retail sales data from the US, which were issued at the opening of the North American market, were favourable for the market due to lower-than-anticipated PPI and weaker retail sales. But investors' attention shifted to Credit Suisse, and as a result the economic data went mostly unnoticed and had no effect on the market.
News from the Swiss government that the Swiss Central Bank would lend money to Credit Suisse came just in time to settle markets. The Credit Suisse share recovered some of its lost ground, despite closing with losses of 14%. Wall Street indices performed similarly, particularly the technology Nasdaq, which closed with gains of 0.54%.
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In conclusion, yesterday was one of intense market tension that shows just how concerned investors are about the state of the financial industry following Silicon Valley Bank’s collapse.
Without a doubt, this will affect the choices made by central banks. Today the European Central Bank (ECB) is faced with a choice between sticking with its current course of interest rate hikes and taking the chance of putting further pressure on the financial system, backtracking and raising rates by only 25 basis points, or pausing and giving up the fight against inflation, which in Europe now exceeds levels seen in the United States.
Sources: Bloomberg, Reuters