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London open: Banks pace decline after UBS agrees to buy Credit Suisse
London stocks slid in early trade on Monday, taking their cue from heavy losses in Asia, with banks under the cosh again after Credit Suisse agreed to be bought by rival UBS.
At 0830 GMT, the FTSE 100 was down 1.3% at 7,237.57.
UBS agreed to buy Credit Suisse for around $3.25bn in an all-share transaction. As part of the deal, Switzerland’s central bank will make available a CHF100bn Swiss franc liquidity line to UBS.
Under the terms of the agreement, should UBS incur in more than CHF5bn in losses from Credit Suisse’s assets, the Swiss government would shoulder the next CHF9bn in red ink, with UBS taking any losses above that amount.
Investors were concerned about the huge hit some Credit Suisse bondholders will take as a result of the deal, as $17bn worth of riskier AT1 bonds will be wiped out.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next. Focus is shifting to the implications of high-risk bond holders in banks, after holders of more risky Credit Suisse debt saw their investment wiped out, as under the deal those additional tier 1 bonds were valued at zero.
“In bankruptcy proceedings, bond holders are higher up the queue than shareholders, but under the contracts signed the same rules don’t have to apply given Credit Suisse was facing a clear viability issue and had already been given support from the central bank.
“It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7% after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30% despite the $30 billion lifeline given to it by large US banks.
“Bigger lenders are still considered to be much better insulated from the chill winds still blowing through the banking sector. They have built up much bigger capital cushions since the financial crisis, have more stable deposits, and some are seeing greater inflows of cash as companies and individuals seek out safer havens to put their money. They are also much less likely to have to sell off bonds, they may have a paper loss on right now, but instead will be able to hang onto them until they mature.
“But as risk aversion grips the sector, the worry is that overall banks will become more cautious in their lending, which could be another blow for already fragile housing markets in particular. Worries are rattling investors about what repercussions a potential lending squeeze will have on the global economy.”
On home shores, a survey out earlier showed that property asking prices rose by 0.8% in March from the prior month and showed signs of stabilising after last year’s ‘mini-budget’, which created severe market volatility.
Rightmove said the market still faced challenges from higher interest rates and economic headwinds.
Optimism about a recovery was tempered by the fact that March’s growth was below the 1% average monthly increase for the month over the last 20 years with sellers more cautious than usual about pricing.
Rightmove director Tim Bannister said the pace of the market reached an “unsustainable level in the last two years, and was on track to slow to a more normal level, though the speed of this slowdown to more normality was accelerated by the reaction to September’s mini-budget”.
“While higher mortgage rates and economic headwinds raise challenges, many potential home movers who were effectively side-lined in the frenetic bidding wars of the last two years will find that a slower-paced market gives them time to plan and secure their next move as we enter the traditionally busy spring-buying season,” Bannister said.
In equity markets, banks were the biggest fallers again, with Standard Chartered, Barclays, NatWest, Lloyds and HSBC all sharply lower.
Precious metals miners were the standout gainers, however, with Endeavour Mining, Fresnillo and Centamin all up.
There wasn’t a whole lot happening on the corporate front, but FirstGroup said the government had extended its current contract for its troubled West Coast rail contract to October 15.
Elsewhere, Intertek announced the appointment of Colm Deasy as group chief financial officer and as an Executive Board director. It also said it was establishing a new Group Executive Committee effective immediately.
Top 10 FTSE 100 Risers
| Sponsored by Plus500 |
|
| # | Name | Change Pct | Change | Cur Price | |
|---|---|---|---|---|---|
| 1 |  |
Fresnillo Plc | +3.44% | +24.40 | 734.40 |
| 2 |  |
Anglo American Plc | +2.74% | +68.50 | 2,572.50 |
| 3 |  |
United Utilities Group Plc | +1.96% | +20.50 | 1,064.50 |
| 4 |  |
Severn Trent Plc | +1.60% | +45.00 | 2,858.00 |
| 5 |  |
Antofagasta Plc | +1.56% | +22.50 | 1,466.50 |
| 6 |  |
National Grid Plc | +1.44% | +15.00 | 1,054.00 |
| 7 |  |
Glencore Plc | +1.25% | +5.40 | 438.05 |
| 8 |  |
Halma Plc | +1.11% | +23.00 | 2,090.00 |
| 9 |  |
Bunzl Plc | +1.11% | +33.00 | 3,008.00 |
| 10 |  |
Bae Systems Plc | +1.08% | +9.80 | 915.40 |
Top 10 FTSE 100 Fallers
| Sponsored by Plus500 |
|
| # | Name | Change Pct | Change | Cur Price | |
|---|---|---|---|---|---|
| 1 |  |
Prudential Plc | -5.69% | -57.40 | 950.60 |
| 2 |  |
Barclays Plc | -4.84% | -6.76 | 132.80 |
| 3 |  |
Standard Chartered Plc | -4.45% | -28.20 | 605.80 |
| 4 |  |
Hsbc Holdings Plc | -3.25% | -17.60 | 524.50 |
| 5 |  |
Phoenix Group Holdings Plc | -3.08% | -17.20 | 541.80 |
| 6 |  |
Legal & General Group Plc | -2.69% | -6.10 | 220.50 |
| 7 |  |
Centrica Plc | -2.65% | -2.68 | 98.52 |
| 8 |  |
Melrose Industries Plc | -2.51% | -3.70 | 143.60 |
| 9 |  |
Direct Line Insurance Group Plc | -2.18% | -3.30 | 148.20 |
| 10 |  |
Lloyds Banking Group Plc | -2.13% | -0.98 | 45.27 |
US close: Stocks pop as banks swoop to save First Republic
Wall Street ended on a high note on Thursday, as major banks deposited a combined $30bn with troubled lender First Republic Bank.
The Dow Jones Industrial Average closed up 1.17% at 32,246.55, while the S&P 500 rose by 1.76% to reach 3,960.28.
The tech-heavy Nasdaq Composite saw the biggest gains of the day, closing up 2.48% at 11,717.28.
The deposit of $30 billion into First Republic Bank was confirmed by a group of 11 banks, including Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.
Each of them confirmed they would be depositing $5bn each into the troubled lender.
The move came on the heels of the recent collapse of Silicon Valley Bank and Silvergate Bank, which heightened concerns of a potential banking liquidity crisis.
Credit Suisse‘s liquidity had been called into question this week, causing consternation on the other side of the Atlantic as well.
However, sentiment surrounding Credit Suisse improved overnight on Wednesday, as the Swiss National Bank announced that it would be providing it with a CHF 50bn loan, among other measures.
“In a week that has seen traders struggle with the concept of whether to buy the dollar for its haven role, or sell it on the premise of a more dovish Fed, today has highlighted the potential for a similarly hawkish take from Powell next Wednesday,” said IG senior market analyst Joshua Mahony.
“Markets are currently pricing in a 79% chance that the Fed will hike by 25-basis points, with pre-meeting volatility likely to further impact those expectations.”
Mahony noted that what the week had proven was how detrimental higher interest rates could be to a sector that many believed was desperate for such a move.
“The pressure is on to cut rates as soon as possible, but the task for now is to stabilise things to allow for further tightening in a bid to drive down inflation first.”
Currency markets were mixed, with the dollar last trading flat on the pound at £0.8258, as it slipped 0.03% against the euro to €0.9422, and it weakened 0.27% on the yen to change hands at JPY 133.38.
Tightness persists in labour market, housebuilding rises
In economic news, the latest data from the US Department of Labor shows that the tightness in the job market persisted last week.
Initial unemployment claims fell by 20,000 to 192,000 for the week ended 11 March.
Meanwhile, the four-week moving average for claims, which smooths out week-to-week variations, fell by 750 to 196,500.
However, secondary jobless claims, which provide a better picture of hiring trends, dropped by 29,000 to 1.684 million for the week ended 4 March.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, attributed the declines in claims to the reversal of the impact from adverse weather in California and the Midwest.
“The trend probably is still below 200,000, but we expect it to rise sharply in the spring as the wave of layoff announcements translates into actual layoffs and claims for unemployment benefits,” he said.
“For now, though, the claims data make it clear that the slowdown in payroll growth over the past year-and-a-half is mostly a story about slowing gross hiring, not rising firings.”
Elsewhere, housebuilding activity in the US saw an uptick last month, but the details of the data revealed a less impressive picture.
Housing starts rose by 9.8% in February to reach an annual rate of 1.45 million, beating consensus estimates of 1.31 million.
However, starts for single-family homes only increased by 1.1% to 830,000.
Building permits increased by 13.8% to 1.339 million, with a 7.6% rise for single-family homes.
“US housing starts were much stronger than expected in February, with a surge in the volatile multi-sector accounting for most of the increase,” Nancy Vanden Houten and Ryan Sweet at Oxford Economics said in a research report.
“The rise in single family starts in February, albeit modest, suggests that the housing sector may have bottomed in January.”
Still on data, manufacturing activity in the US mid-Atlantic region failed to rebound as expected in March, according to a survey by the Federal Reserve Bank of Philadelphia.
The factory sector index increased from -24.3 in February to -23.2 in March, worse than economists’ expectations of -14.5.
The sub-index tracking new orders also fell from -13.6 to -28.2.
Earlier in Europe, rate-setters in Frankfurt raised short-term interest rates by 50 basis points, despite the recent stress in the banking sector on both sides of the Atlantic.
The European Central Bank stated that the move was in line with its goal of achieving a “timely return” of inflation to its 2.0% medium-term target.
However, the bank also acknowledged the “elevated” level of uncertainty and emphasised its data-dependent approach.
Some analysts had argued that not following through with the guidance might be perceived as a sign of serious concerns around lenders.
Adobe beats the Street, Charles Schwab falls further
In equities, Adobe rose 5.9% after the release of its quarterly earnings report, which surpassed Wall Street’s expectations.
The creative software giant’s positive results were released on Wednesday after the closing bell.
On the downside, however, Charles Schwab Corporation declined 2.8%, despite executives revealing they had purchased nearly $7m worth of its shares on Tuesday and Wednesday.
The financial services provider’s stock had taken a hit in the banking turmoil this month, falling by almost 25%.
Monday newspaper round-up: John Lewis, UK steel industry, Newcleo
Plans by loss-making retailer John Lewis to end more than seven decades as a 100% employee-owned business have drawn criticism from an MP and supporters of its mutual ownership model. Sharon White, who chairs the company behind the eponymous department store chain and Waitrose, believes the business could raise up to £2bn in new investment by diluting its mutual model, according to reports. – Guardian
The government’s failure to support the ailing UK steel industry in last week’s budget has put thousands of jobs at risk, the prime minister has been told. In a letter to Rishi Sunak, shared with the Guardian, the trade union Unite said it was “disappointed” that the government had not announced plans to tackle the “serious threats facing the sector”. – Guardian
Morrisons is cutting its prices for the third time in three months as it steps up efforts to lure shoppers back from Aldi. The supermarket said it was slashing prices on another 490 products, including fresh meat, baby essentials and freezer items. The latest round of reductions follows rounds of price cuts last month and in January. – Telegraph
Britain has little hope of hosting a successful orbital rocket mission this year, space officials have admitted, after the failure of Virgin Orbit’s “Start Me Up” satellite launch in January. Staff at the Civil Aviation Authority (CAA) have privately told members of the space industry that there is unlikely to be another mission in 2023, according to two sources. – Telegraph
A British-based nuclear company backed by Italy’s Agnelli family plans to raise nearly £900 million to advance a plan to build a fleet of small nuclear reactors in Britain. Newcleo, based in London, has an ambitious scheme to build one plant a year in the UK up to 2050 and eventually generate 4 gigawatts of electricity, more than will be produced by the large new nuclear plant being built at Hinkley Point in Somerset by EDF. – The Times
The number of problems affecting Twitter has more than doubled under Elon Musk’s ownership, according to data from an organisation that monitors internet performance. ThousandEyes noted that since the takeover the site had been slower than usual and content did not load. The figures suggest that financial cuts and large-scale layoffs inflicted on the platform in the past few months are taking their toll on the company’s operations. – The Times
