Quite a week as the focus now turns to the Fed
As a turbulent week comes to an end, stocks around the globe recovered after central banks stepped in to restore confidence in the financial system. The Swiss government shoring up Credit Swiss by lending 50 billion Swiss francs to its under-siege bank, along with the rumblings of a suggestion of a merger with UBS. The banking sector came to the rescue of First Republic as a consortium of them offered $30 billion of uninsured deposits from a consortium of banks that includes JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, Truist and U.S. Bank. FRC’s stock ended the day at $34.27, up 10% on the session. The banking sector gained just over 3.5% on the day. Treasury yields rose as bonds sold off.
They say things come in three’s first FTX, then SVB and finally, the events of the past few days that saw governments once again have to step up to stabilise the banking system. Banking consortiums coming to the aid of First Republic provided unity reminiscent of 1998 when the financial system acted in a similar way as a result of the collapse of Long Term Capital. A further indication of the stresses in the financial system as banks borrowed over 150 billion dollars from two Federal Reserve backstop facilities in the most recent week.
As the focus remained on the banking sector, other noteworthy news took the second stage, including some good numbers from FedEx, the global carrier, and the ECB going ahead with its 50 basis points rise in interest rates. As Christine Lagarde explained, the decision to go ahead with the 50 basis point rise as the board would treat the heightened tensions in financial markets separately from its strategy for bringing down inflation. Acknowledging there is a link between the two. Jeremy Hunt delivered his budget confirming the increase in corporation tax whilst trying to soften the blow by offering reforms to childcare and allowing increased contributions to your pension scheme to help support people going back to work. His budget came across rather as the man does, a bit dull, despite his perma-grin. Geopolitical risk remains on the horizon as a Russian fighter brings down a US drone over the Black Sea. Our government is not the only advocator of tax and spending as Joe Biden released his budget proposals offering an additional 8 trillion dollars of investment in the next ten years to be paid for by an extra 5 trillion in taxes.
Stocks in Europe appear to be continuing the rally of yesterday as investors appear to have taken comfort from the actions to restore confidence in the banking sector. Next week the Fed will come under scrutiny at its monthly meeting.