Bring on the Bank of Dave

A very eventful week for stock and bond markets, starting with the rescue of SVB and climaxing with UBS being asked to save something of Credit Swiss from the ashes. Away from the banks, the budget produced, aside from a few giveaways, little to suggest that the government has a plausible plan to stimulate economic growth in the UK economy. In other news, China cut its reserve ratio requirement ratio by 25 basis points to support lending and encourage growth. The reaction to the events of the past week has been more dramatic for bonds than it has for equities. After the initial sell-off in equities at the start of the week, the S&P 500 finished roughly where it started, and the Vix moderately lower. US treasury yields fell dramatically as investors looked to take cash from banks’ balance sheets and place them onto governments. From the start of the month ten years, yields have fallen from 4% to below 3.4%. The two-year fall has been even more dramatic, falling from almost 5% to below 4%.

 The move in crypto this week, as Bitcoin gained over 10%, on the one hand, could be a tad surprising as one would have thought money would flow from speculative assets. On the other, it may reflect the mood to take money away from the traditional financial system.

Newspaper reports that UBS has paid 1 billion Swiss francs for Credit Swiss, well below Friday’s market cap of closer to 8 billion. UBS getting support for the deal from the Swiss regulators. Credit Swiss 167-year history looks to be coming to an end.

The real interest this week will be the two-day monthly Fed meeting, the last scheduled one for a couple of months. Reacting to the events of the past week will be a tricky one for them. Assuming do not we do not face a similar style failure of the banking system that we faced in 2008, which no one is predicting, as banks remain well capitalised, the events may have helped the Fed fight against inflation.

The probability is lending standards will tighten and access to capital will become harder. If there is one measure that best predicts the likelihood of an economic recession, it is access to capital. The chart below demonstrates standards for lending money have already tightened considerably, and when this happens, it invariably leads to an economic recession( the greyed-out area). An economic downturn will lead to inflation rates falling dramatically, allowing the Fed to add liquidity and start the next economic recovery. The question for this week is, how much will the Fed anticipate that now when it comes to making their decisions at this week’s meeting? Other events this week a raft of UK inflation data and CBI industrial trends orders. The Bank of England meets on Thursday for their interest rate decision, currently expected to raise rates by 25 basis points. US jobless claims will be important, as will the Global Flash PMIs at the end of the week.

Despite the announcement of the merger of Credit Swiss and UBS, markets are starting the week on the back foot.