You’ve got to focus your energy on where the reward is greatest
And just like that, the bond market is now pricing in rate cuts.
Banking sector collapse can do that.
So last week I wrote about the collapse of Silicon Valley Bank. A modest, but significant lender.
No sooner had the dust settled on SVB, that all eyes turned to Credit Suisse – the Swiss International banking giant.
Markets were taking a good look, and they didn’t like what they saw.
I mean. Let’s not blame markets. Credit Suisse themselves came out on Tuesday night an announced that they had found “material weaknesses in its financial reporting processes for 2021 and 2022.”
I don’t know what that means, but it certainly doesn’t sound good!
Markets didn’t think so either, and CS’s share price fell 30%, before a trading halt was issued.
This story is a few years in the making. Clouds have been gathering around Credit Suisse for a while now. It’s been having a rough trot. Its troubles included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media.
But more than any of that, it’s costs were too high and its margins too low. Markets are willing to overlook money-laundering convictions for drug-dealers. They’re not willing to overlook profitability downgrades.
(Yay capitalism!)
So the weird thing is that on the face of it, this appears connected to the collapse of SVB, but there’s no material connection. The duration mismatch that killed SVB isn’t a story for Credit Suisse.
The only common factor is a market on tenterhooks, wondering where the next wound in the financial system is going to open up.
And I’m not sure it’s going to be Credit Suisse. They’ve announced that they’re tapping an $81bn credit facility from the Swiss Central Bank, so I think they should be right.
But this is the game right now. We don’t know where the next rupture is going to appear. It could be anywhere.
And what if it happens in a nation that doesn’t have an institution with the pockets the size of the Swiss Central Bank?
Everybody’s nervous.
Bond market have swung from predicting rate hikes in Australia, to predicting rate cuts.
Well, that was last week anyway. The bond market is all over the shop.
Still, I think it’s probably time for the RBA to take a breather.
It’s getting pretty wild out here.
JG.
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