Stock futures slip lower as banking crisis spreads; Week Ahead: Fed meeting in focus as rate bets mixed; UBS buys credit Suisse for $3.3 billion, gets massive government support; First Republic shares slump after second S&P downgrade and New York Community Bancorp cuts deal to buy Signature Bank.
Five things you need to know before the market opens on Monday March 20:
1. — Stock Futures Slip Lower As Banking Crisis Spreads
U.S. equity futures edged lower Monday, while Treasury bonds rallied and the dollar held onto gains against its global peers, as the weekend takeover of Credit Suisse by its rival UBS failed to soothe investor concerns over the health of the global banking sector and the breadth of the simmering sector crisis.
Swiss regulators, government officials and the Swiss National Bank orchestrated the late Sunday deal, which will see UBS paying $3.25 billion for Credit Suisse while receiving billions more in liquidity and loss support, just days after declaring the bank solvent following statements from its biggest shareholder in Saudi Arabia.
The speed at which Credit Suisse tumbled, and the decision to wipe out $17 billion in higher-ranking bonds, known as AT1s, while providing billions for equity holders, rattled the European banking sector and otherwise marred the impact of the government-brokered solution.
A late Sunday move by the Federal Reserve to increase the Frequency of so-called dollar swap lines to five major central banks for the first time since the global Covid pandemic also suggested officials fear that pressures in regional U.S. lenders could spillover into the broader banking sector.
U.S. bank, in fact, borrowed a record $152.8 billion from the Fed’s discount window over the week ending on March 15, a massive leap from the $4.58 billion taken out during the prior period.
The Stoxx 600 Banks index was marked 3.03% lower in early Frankfurt trading, paring an earlier decline of around 5%, extending its month-to-date slump to around 19.3%.
Flight-to-safety trades flourished in overnight dealing as a result, with gold rising 1.3% on the session to a one-year high of $2,007.30 per ounce while benchmark 2-year Treasury note yields fell 7 basis points from late Friday levels to trade at 3.774%.
The U.S. dollar index, meanwhile, was marked 0.1% higher against a basket of six global currency peers and trading at 103.807.
Market volatility gauges, however, were moving firmly higher as well, with the CBOE Group’s VIX index rising 18% in the overnight session to 27.05 points, suggesting traders see daily swings on the S&P 500 of around 66 points, or 1.69%, over the near term.
Futures contracts tied to the S&P 500 are indicating a 5 point opening bell dip while those linked to the Dow Jones Industrial Average were looking at an 85 point decline. The tech-focused Nasdaq is looking at 10 point gain amid the pullback in Treasury bond yields.
In overseas markets, Europe’s Stoxx 600 edged 0.07% higher in early Frankfurt trading while Britain’s FTSE 100 was marked 0.14% lower in London.
Overnight in Asia, the region-wide MSCI ex-Japan index was marked 1.36% lower into the close of trading while the Nikkei 225 closed 1.42% higher in Tokyo
2. — Week Ahead: Fed Meeting In Focus As Rate Bets Mixed
The Federal Reserve’s March policy meeting, slated to being Tuesday and culminate with a final rate decision and press conference Wednesday, sits alone atop any investor’s list of events in a week bereft of earnings and economic data.
Beyond the central bank’s inflation challenge, which was complicated last week by an untick in core consumer price pressures within it favored reading — the PCE Price Index — Chairman Jerome Powell and his colleagues will also need to calibrate the impact of the now-global banking crisis on monetary policy and determine if the resultant slowdown in loan and credit growth will produce deflationary results.
The CME Group’s FedWatch now suggests a 40.2% chance that the Fed will hold rates steady at between 4.5% and 4.75%, with a 36% chance of a 25 basis point rate cut priced in for the June policy meeting.
Nike (NKE) – Get Free Report will publish its third quarter earnings after the close of trading Tuesday, with analysts looking for a bottom line of 55 cents per share on revenues of $11.47 billion – a 5% increase from last year.
General Mills (GIS) – Get Free Report and Darden Restaurants (DRI) – Get Free Report will also provide February quarter updates, as investors look to the close of the first quarter and eye profit potential over the three months ending in June for the broader S&P 500.
First quarter earnings are set to fall 4.6% from last year to $422.5 billion, before rebounding to a 5.8% gain over the second quarter.
Other data releases of note this week include existing home sales data for the month of February, due Tuesday at 10:00 am EST which will be closely-tracked to see if it matches the surprise 9.8% gain recorded for housing starts over the same month, and the preliminary reading for S&P Global’s March PMI readings, which are slated for Friday at 9:45 am EST.
3. — UBS Buys Credit Suisse For $3.3 Billion, Gets Massive Government Support
UBS (UBS) – Get Free Report shares slumped lower in pre-market trading after the Swiss bank purchased struggling lender Credit Suisse Group (CSGKF) for around $3 billion in a deal that was ultimately brokered by government officials and the Swiss National Bank.
The SNB said the deal, which includes 100 billion Swiss francs ($104 billion) in liquidity assistance for both firms, will “secure financial stability and protect the Swiss economy in this exceptional situation.” Karin Keller-Sutter, Switzerland’s Finance Minister, added that a Credit Suisse bankruptcy would have cased “irreparable consequences” for global financial markets.
UBS will pay around $3.3 billion for Credit Suisse in an all share-deal that values the bank at 0.76 Swiss francs per share, 60% discount to its Friday closing value. UBS will also get a $9 billion swiss franc backstop on unrealized losses at Credit Suisse.
UBS shares were marked 8.8% lower in early Zurich trading and changing hands at $15.64 Swiss francs each, while Credit Suisse shares plunged nearly 60% to reflect the fixed-stock ratio terms of the deal.
4. — First Republic Shares Slump After Second S&P Downgrade
Frist Republic (FRC) – Get Free Report shares extended declines in pre-market trading, and look set to open at an all-time low, following a second credit rating downgrade for troubled San Francisco-based lender over the weekend.
Standard & Poor’s, which had lowered First Republic’s credit rating into ‘junk’ status only last week, cut it by a further three notches tp B+ on Sunday, saying the bank continues to face “high liquidity stress with substantial outflows”.
The ratings company also said the recent move by a consortium of 11 banks, lead by JPMorgan Chase (JPM) – Get Free Report to add a collective $30 billion to its deposit base “may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing.”
First Republic shares were marked 15.3% lower in pre-market trading to indicate an opening bell price of $19.50 each.
5. — New York Community Bancorp Cuts Deal To Buy Signature Bank
New York Community Bancorp (NYCB) – Get Free Report shares jumped higher in pre-market trading after the lender agreed to terms with the Federal Deposit Insurance Corporation to buy the failed Signature Bank.
Flagstar Bank, a subsidiary of New York Community Bancorp, will assume all of Signature Bank’s branches and the bulk of its deposit base and pay around $2.7 billion for the bank’s $12.9 billion loan book under terms of the deal.
The FDIC, meanwhile, said its Deposit Insurance Fund would take a $3.5 billion hit from the arrangement, around 1.95% of its total value as of the end of December.
“Both the Company and the Bank were well positioned prior to the recent market turmoil, with strong capital, a stable retail deposit franchise, and ample liquidity,” said New York Community Bancorp CEO Thomas Cangemi. “Moreover, our asset quality metrics remain solid, as they have over multiple business cycles.”
New York Community Bancorp shares were marked 10.4% higher in pre-market trading to indicate an opening bell price of $7.22 each.