Marketmind: Investors adopt the brace position as banks topple

A look at the day ahead in European and global markets from Wayne Cole

During the last big banking crises, an analyst was asked by a TV anchor what position he would recommend for investors? “Fetal” was his terse answer.

That pretty much sums up the reaction in Asian markets to the extraordinary government-engineered takeover of the storied Credit Suisse by UBS, along with a U.S. dollar supply operation by a Fed-led posse of major central banks. Incidentally, the BOJ’s US$ tender today found no takers, suggesting there’s no dollar drought in Asia as yet.

Investors seem torn between relief that Credit Suisse was not allowed to collapse or worries that it had to be saved in such a way in the first place. That worry about who might be next has greatly limited the risk-on rally, with U.S. stock futures and sovereign bond yields up only slightly.

It’s not helping that Credit Suisse shareholders are taking a nasty haircut in the deal, though not as painful as AT1 bond holders who seemingly won’t get their $17 billion back.

That’s a break with convention that could threaten the future of the entire $275 billion CoCo market. Interestingly, Goldman Sachs is reportedly setting up a claims market for the debt, so there must be a chance market pressure – or lawsuits – will soften this ruling.

Volatility is still very much here, as two-year Treasury yields started at 3.90%, jumped to 4.03% only to come all the way back to 3.88%. Rates will no doubt have changed again by the time this sentence ends.

It’s not helping that speculators were super short of Treasuries into this event and must be sitting on huge paper losses and the market can’t correct properly until these are cleared out.

Likewise, Fed fund futures fell, rose, then fell again as investors dared to divine what all this might mean for interest rates. Right now, futures have a two-in-three chance the Fed hikes by 25bp on Wednesday, but then it’s all downhill with 75-100bp of easing implied by year-end.

The Bank of England also meets this week and markets are split on whether it pauses or goes 25bp. Note, in both cases it might be really hard to re-start hikes once you have paused, so markets would take it as an end to the whole cycle, whether policymakers want that or not.

Oddly, the market still thinks the SNB will hike borrowing costs by 50bp at its meeting on Thursday, just a few days after providing more than 160 billion francs in loans and guarantees to the new UBS grouping. No disconnect there.

Key developments that could influence markets on Monday:

– Introductory statement by Christine Lagarde, ECB President, at a hearing of the European Parliament in Brussels – 1400 GMT

(Editing by Jacqueline Wong)