Market: the turmoil is not over


(CercleFinance.com) – The Paris Stock Exchange should open lower on Monday morning, the surprise announcement of the takeover of Credit Suisse by UBS having nipped in the bud the timid attempts at a rebound that were looming at the end of last week.

Around 8:15 am, the ‘future’ contract on the CAC 40 index – which has now switched to the April deadline – fell 99 points to 6835.5 points, suggesting a decline of more than 1% at the start of the session.

UBS announced last night its intention to buy Credit Suisse for an amount of three billion Swiss francs (about three billion euros), an unexpected decision for many investors.

This forced marriage should again penalize the actions of the major European banks, which have been at the heart of market concerns for a week now.

The accumulation of concerns around the sector thus threatens to undo the good start to the year signed by the European stock markets: after losing 4% last week, the CAC has only kept a gain of 7% since 1 January.

For analysts at Capital Economics, market prospects today remain ‘extraordinarily uncertain’.

‘The structure of the Credit Suisse deal does nothing to help matters by forcing bondholders to take losses while protecting some shareholders, which could set the stage for further upheaval in the days ahead’, warns the London-based design office.

The weight of bad debts and the impact of the rise in interest rates could indeed penalize the most fragile banks, raising fears of new bankruptcies.

A revealing element of this genuine crisis of confidence, the STOXX Europe 600 banking index has now shown an eloquent decline of almost 0.1% since the start of the year.

Investors are therefore preparing to face this week the same turbulence that has plagued the markets for ten days, namely a seemingly endless worsening of the global banking crisis.

Given the mistrust that currently surrounds European banks, the meeting of the Federal Reserve’s monetary policy committee, which will be held tomorrow and Wednesday, is almost a non-event.

The markets nevertheless seem to be anticipating a change of course on the part of the Fed, which should be keen not to further destabilize a financial system already in turmoil.

According to the CME Group’s ‘FedWatch’ barometer, investors estimate that the probability of a status quo for the US central bank at the end of its FOMC this week is close to 48%.

The remaining 52% are counting on a limited rate hike of 0.25 percentage points.

“If the Fed were to make a 0.5% hike – which seemed entirely possible just a week ago – markets could be seriously shaken,” warns Steven Bell, chief economist at Columbia Threadneedle Investments for the European region.

The erratic movements of the CBOE’s VIX volatility index – often dubbed the ‘fear barometer’ on Wall Street – also point to wide market swings.

If some strategists assure that the situation is not as serious as at the time of the financial crisis of 2008, the markets are therefore preparing to experience high volatility this week, with large pendulum movements.

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