By Swissquote Analysts
Credit Suisse Bond Wipeout Threatens $250 Billion Market
Topic of the day
Credit Suisse Group AG's emergency merger with UBS Group AG will wipe out the bank's riskiest bonds, rattling investors in the quarter-trillion-dollar market for similar bank debt. About 16 billion Swiss francs, or about $17.3 billion, of the bank's additional tier 1 bonds will be completely written down, Switzerland's financial regulator, Finma, said in a Sunday statement. Credit Suisse also said it was informed by Finma that the bonds would be "written off to zero." European and Asian AT1s fell Monday with one of the bonds issued by HSBC Holdings PLC dropping 8% to 88 cents on the dollar in heavy trading. A roughly $1 billion AT1 exchange-traded fund from Invesco dropped 8.7%, while a similar ETF from WisdomTree slid 6.3% in recent trading. UBS AT1s with a 2025 call fell Monday to around 85 cents on the dollar compared with 93 cents on Friday, according to Tradeweb. AT1 bonds -- also known as contingent convertible bonds, or CoCos -- were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios.
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The Switzerland stock market ended modestly higher on Monday, recovering fairly well after an early setback. Investors largely made cautious moves, digesting the developments in the banking sector. The benchmark SMI, which tumbled to 10,395.33 in early trades, ended the session with a gain of 30.09 points or 0.28% at 10,643.64, after hitting a high of 10,689.76. The government-backed acquisition of Credit Suisse by UBS Group, and the Federal Reserve's announcement that it has joined with other central banks to take coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements helped lift investor sentiment. On Sunday, UBS agreed to take over the Credit Suisse in an all-share deal worth $3.25 billion under pressure from the Swiss authorities. Credit Suisse, a 167-year old bank and the second largest in Switzerland, had been facing issues due to scandals, irregularities and management troubles for a long time. Shares of Credit Suisse plunged nearly 56%, while UBS Group gained about 1.3%, recovering after an early setback. Zurich Insurance Group and Richemont, both gained nearly 2.5%. Partners Group climbed about 2.2%, while Givaudan surged nearly 2%. Holcim, Swiss Re, ABB, Swiss Life Holding, Swisscom and Geberit gained 1 to 1.7%. In the Mid Price Index, Julius Baer soared 8.25%. Tecan Group and Swiss Prime Site gained 2.8% and 2.6%, respectively.
European stocks shrugged off early weakness and surged higher on Monday, with investors reacting to extensive efforts by central bankers and governments to address turmoil in the banking sector. European Central Bank President Christine Lagarde's assurance that Eurozone banks have capital and liquidity levels well beyond their requirements contributed as well to the positive mood in the markets. The pan European Stoxx 600 ended 0.98% up. The U.K.'s FTSE 100 gained 0.93%, Germany's DAX climbed 1.12% and France's CAC 40 surged 1.27%, while Switzerland's SMI gained 0.28%. Among other markets in Europe, Austria, Belgium, Czech Republic, Denmark, Finland, Greece, Ireland, Netherlands, Norway, Poland, Portugal, Russia, Spain and Sweden closed notably higher. Iceland and Turkiye ended weak. In the UK market, Anglo American Plc, Fresnillo, Antofagasta, Endeavour Mining, Glencore and IAG gained 3.3 to 5%. BAE Systems, Frasers Group, Mondi, 3I Group, Aviva, Smufit Kappa Group, Vodafone Group, Rio Tinto, Beazley and British Land gained 2 to 3%. Standard Chartered ended lower by 3%. Barclays drifted down 2.3%. Centrica and Scottish Mortgage both ended lower by about 1.3%. In the German market, Siemens Energy, Hannover Rueck, Munich RE, Deutsche Boerse, Puma, HeidelbergCement, E.ON and Commerzbank surged 2.3 to 4%. Deutsche Post, Deutsche Telekom, Daimler, Allianz, Adidas, Siemens and RWE also ended sharply higher.
U.S. stocks climbed Monday on hopes for stability in the banking sector after regulators engineered a deal for Swiss banking giant UBS to take over rival Credit Suisse. The Dow Jones Industrial Average added 382.60 points, or 1.2%, to 32244.58, its largest one-day percentage gain since Jan. 6. The S&P 500 rose 34.93 points, or 0.9%, to 3951.57. The tech-focused Nasdaq Composite climbed 45.02 points, or 0.4%, to 11675.54. The indexes declined Friday. Shares in First Republic Bank, a key concern at present for U.S. officials, dropped $10.85, or 47%, to $12.18, an all-time low, according to data going back to 2010. Major bank chief executives, led by JPMorgan Chase & Co. Chief Executive Jamie Dimon, are discussing fresh efforts to stabilize the troubled bank, The Wall Street Journal reported. Other regional bank stocks rallied, with PacWest Bancorp shares up $1, or 11%, to $10.28 and Fifth Third Bancorp up $1.26, or 5.1%, to $26.21. Bed Bath & Beyond Inc.’s shares fell 21% Monday after the retailer disclosed substantial dilution from a recent equity deal, potentially preventing it from raising more money from a crucial investor, hedge fund Hudson Bay Capital Management LP. The home-goods retailer’s stock closed at 81 cents Monday, after it said Friday that the number of its common shares had nearly tripled to at least 335 million as of March 15 from 117 million as of late January.
The stock exchanges in East Asia and Australia recovered more or less significantly from their previous day's losses on Tuesday thanks to positive guidance from the US stock exchanges. In Shanghai, the Composite Index advanced by 0.2 per cent, while the Hang Seng Index in Hong Kong was up 0.3 per cent after Monday's heavy losses. There, the shares of the bank HSBC, which had been sold off heavily on Monday, recovered by a good 2 per cent.
The yield on the U.S. benchmark 10-year Treasury note ticked up to 3.477% from 3.395% Friday, reversing an earlier decline. Yields rise when prices fall. Most actively traded gold futures jumped as much as 2% before moderating gains to settle 0.5% higher.
UBS raises Glencore to Buy (Neutral) – Target 560 p
JP Morgan raises Thales to Overweight (Neutral) – Target EUR 160
Deutsche Bank lowers Mayr-Melnhof target to EUR 160 (170) – Hold
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