EUROPEAN EQUITY UPDATE: Stocks slump as Banking sector fears take centre stage

Analysis details (09:13)

• Focus for the equity space has largely been on events stateside after it was announced over the weekend that uninsured depositors of SVB will be “made whole”, whilst the Fed announced its Bank Term Funding Program (BTFP) which will provide liquidity to US depository institutions in which each Federal Reserve bank would make advances to eligible borrowers, taking as collateral certain types of securities. These announcements provided some reprieve for APAC equities which initially opened lower following the losses on Wall Street on Friday. In the end, stocks in the region closed mixed with Chinese bourses outperforming as the Hang Seng was supported by gains in the tech sector and the mainland was underpinned after stronger-than-expected loans and financing data and President Xi’s surprising decision to retain Yi Gang at the head of the PBoC.


• The revival of sentiment overnight provided notable support for US equity futures whilst priming European stocks for a positive open. However, after the European cash open, stocks staged a pullback with European indices now lower (Eurostoxx 50 -2.0%).


• US futures (ES +0.5%, NQ +0.8%, RTY +0.2%) are firmer but well off best levels with concerns still lingering over regional banks such as First Republic (FRC) and Western Alliance Bancorporation (WAL) down 55% and 21% respectively in pre-market trade amid concerns over deposit withdrawals. Additionally, it is worth noting that reporting over the weekend suggested that the chances of Silicon Valley Bank or Signature Bank being acquired by a rival bank was unlikely as all potential buyers have so far walked away, according to FT sources. Larger US banks were initially faring better on account of backstop measures before eventually being swept up by the deterioration in risk sentiment with JPM (Unch), BAC (-3.7%), WFC (-1.5%) and Citi (-0.2%) now all lower in the pre-market.


• In terms of Fed pricing for the March meeting, 50bps has been taken off the table with 25bps seen at 62% and unchanged at 38%. Goldman Sachs said it no longer expects the Fed to hike rates at the March meeting in light of recent stress in the banking system and sees US measures will provide substantial liquidity to banks facing deposit outflows and improve depositor confidence, while it still expects the Fed to hike 25bps in May, June and July with its terminal rate view now at 5.25%-5.50%.


• With regards to Silicon Valley Bank’s UK operations, HSBC (-2.8%) has acquired its UK subsidiary for GBP 1 with the BoE stating that the wide UK banking system remains safe. With regards to the European banking sector, Barclays sees “a limited read-across from yesterday's SIVB / US events for European banks under coverage. We expect higher funding costs and possibly higher loan losses overtime, but we see this driving pressure on earnings rather than liquidity risks”.


• In terms of broader market views, JPM notes that it thinks the FTSE 100 still looks better than S&P 500 and within the UK, maintains its long FTSE 100 vs FTSE 250 trade (which it opened in Nov ’21). JPM states that certain domestic plays have seen a good relief bounce, but in general JPM thinks that the UK consumer is likely to struggle given the delayed impact of rising interest rates.


• Equity sectors in Europe are lower across the board with the Stoxx 600 Banking sector the clear laggard with losses of 4% as markets remain fearful over the contagion within the industry; individual laggards are far too many to mention. Elsewhere, in the financial sector Insurance names are also faring poorly with Direct Line Insurance (-5%) a notable loser post-FY results.

13 Mar 2023 - 09:21- Research Sheet- Source: Newsquawk