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By Jamie McGeever, Columnist, Global Finance & Market

Monday, March 20, 2023

Buckle up.

Asian markets are set for a volatile open on Monday after Swiss authorities said UBS <UBSG.S> is taking over Credit Suisse <CSGN.S>, a forced merger investors hope will ease the strain on the global banking system and avert a full-blown crisis.

The $3.2 billion deal comes after a sudden burst of turmoil in the global banking sector – two U.S. bank failures then Credit Suisse’s implosion – sparked unprecedented volatility in the U.S. interest rate and bond markets.

Will it be enough to calm the horses? On the face of it, probably. But asset writedowns worth billions of dollars will inflict losses on investors already whiplashed by recent events.

The logo of Credit Suisse is pictured in front of the Swiss Parliament Building, in Bern, Switzerland, March 19, 2023. REUTERS/Denis Balibouse

China’s central bank announces its latest interest rate decision on Monday morning. With recent inflation much weaker than expected and following Friday’s reserve requirement cut, the 1-year and 5-year loan prime rates are expected to be left at 3.65% and 4.30%, respectively.

Given the global banking and market turmoil swirling right now, a rate cut would not be a total shock. But Asian market direction on Monday will be driven by events in Europe and the United States.

Last week, MSCI’s World Index ended flat, MSCI Asia ex-Japan rose 0.5%, the S&P 500 rose 1.5%, and the Nasdaq jumped a remarkable 4.5%, lifted by hopes the Fed’s rate-hiking campaign could be over.

The Fed delivers its latest policy decision on Wednesday. But no equity market will be able to ignore the seismic shifts in U.S. rates and bonds for long. Last week was historic:

– the 2-year U.S. yield fell 75 basis points, its biggest weekly fall since Black Monday in 1987

– the two-year yield has now moved 20 bps or more for seven straight days, the longest streak since at least 1976

– the U.S. 2s/10s curve steepened by 50 bps last week, the most in at least a decade

– the ‘MOVE’ index of Treasury market volatility posted its biggest weekly rise since 2008, and fourth-largest since the index was launched two decades ago.

The damage to investors of all stripes from that level of volatility in one of the world’s most liquid and systemically important securities cannot be overstated. Those with direct exposure will be suffering huge losses.

If all that was not enough, geopolitical tensions will be on investors’ radar too. China’s President Xi Jinping is in Moscow, his first international trip since securing a third term as president, visiting Russian President Vladimir Putin.

Xi is seeking to strengthen ties and cement his “no limits” partnership with the increasingly isolated Putin, who faces criminal charges over his Ukraine war.

Graphics are produced by Reuters.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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