EUROPEAN EQUITY UPDATE: Europe lifts off lows but the UBS-Credit Suisse rescue deal hits the banking sector

Analysis details (09:10)

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  Equities in Europe were initially pressured following the fallout of weekend developments, in which UBS (-11.0%) is to acquire Credit Suisse (-62.4%) for a total consideration of CHF 3bln (vs Credit Suisse’s ~CHF 7bln market cap at Friday’s close), with Swiss regulator FINMA also determining that Credit Suisse’s Additional Tier 1 (AT1) capital in the aggregate nominal amount of around CHF 16bln will be written off. Furthermore, the Fed, BoE, BoC, BoJ, ECB and SNB agreed on coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap lines with daily 7-day maturity operations. Analysts at CapEco suggested “This deal could draw a permanent line under the Swiss banking sector’s problems. Credit Suisse has been absorbed into a healthier bank with much deeper pockets. This should provide time for the UBS management to reform Credit Suisse and shrink its troubled investment bank”, but warn that “the track record of shotgun marriages in the banking sector is mixed”, and “while the deal may yet prove to be a turning point in the current banking crisis, we will probably not know for certain for a while yet.” Nonetheless, the announcement overall failed to allay fears of a broader banking crisis in early European trade. US equity futures are subdued but off worst levels (ES -0.3%, NQ -0.2%, YM -0.5%, RTY -0.3%) with some of the smaller regional banks continuing to see losses (First Republic Bank -22% pre-market, Western Alliance Bancorporation -5.3% pre-market). The NQ future is the better performer as yields plummet as bonds see haven bids. In terms of main events this week, the Russian and Chinese presidents will be meeting from today through to Wednesday, with all eyes on the FOMC midweek, ahead of the BoE’s confab on Thursday.


• Stocks in Europe kicked off the session on the back foot following a similarly negative APAC performance, but regional bourses have lifted off worst levels and now see a mixed picture (Euro Stoxx 50 +0.1%; Stoxx 600 -0.3%). The Swiss SMI (-1.0%) is the laggard as UBS and Credit Suisse’s shares sink on the aforementioned deal, with UBS Credit Default Swaps (CDSs) also rising following the emergency takeover. Sectors are mostly in the red. Defensive sectors were initially more cushioned before the overall picture turned mixed. The Banking sector remains the laggard as European banks opened in the red across the board [At the open: Deutsche Bank (DBK GY) -7.8%, Barclays (BARC LN) -5.5%, Commerzbank (CBK GY) -5.0%, BNP Paribas (BNP FP) -4.5%, ABN AMRO (ABN NA) -3.0%, NatWest (NWG LN) -3.0%, Santander (SAN SM) -2.9%], although banks have trimmed opening losses. Other lagging sectors include Insurance, Energy, whilst Basic Resources moved up the ranks to become the top performer at the time of writing.


• In terms of broader commentary, BofA, in a note published Friday, said they remain negative on European equities and cyclical vs defensives. The bank says “our expectations of weakening growth, widening risk premia and fading EPS expectations imply a further 18% potential downside for the Stoxx 600 to 365 by Q3, with a dovish re-pricing of central bank expectations and lower real bond yields (i.e. the discount rate for equities) only providing a partial offset. Our projections of slowing growth, widening credit spreads and fading bond yields keep us underweight cyclical versus defensives and value versus growth.”

20 Mar 2023 - 09:10- EquitiesResearch Sheet- Source: Newsquawk