Market Watch reports that contagion fears are triggered due to the collapse of Silicon Valley Bank and the Signature Bank. The Credit Suisse fallout exacerbated the fall of these banks. Credit Suisse sets the way for new expectations for 100 basis points or a full percentage point. It is concerning the interest rate cuts by the Federal Reserve before the end of this year.
Businesses estimate a 41.9% chance that the Federal Reserve funds rate target will drop to 3.5% or 3.75%. It can dip even lower by December. The report is according to the CME FedWatch Tool.
So, the above-speculated interest rate data can be down from the present target of 4.5% and 4.75%. This implies 100 basis points of rate cuts by the Fed in 2023. Thus, a good chance of rates moving toward 6% this year and remaining there prevails.
Behind the expectations is the concern that contagion fears may not be contained to only a few banks. This is more true after the top shareholder of Switzerland’s Credit Suisse told Bloomberg that it would not raise its stake in the Swiss bank.
Last week, Jerome Powell pointed out the possible requirement to reaccelerate the trend of rate hikes. However, he said that the policymakers had not decided for their next meeting on March 22, 2023.
Market Watch further reports that traders see a 50.5% chance of a stop next week. Ben Jeffery and Ian Lyngen of BMO Capital Markets strategists said there is a 49.5% likelihood of a quarter-point move. Credit Suisse is now in focus at the present moment. This is as the bank’s shares have dropped. This drop is a fresh all-time low (which is declining by more than 20%).
Treasury yields went down in New York trading. This comes with the policy-sensitive – two-year rate falling 24.8 basis points. It is falling to an almost 6-month low of 3.973%.
In the meantime, the S&P 500 and Dow industrials have finished lower as Credit Suisse fallout amplified fears about other banks. Capital Economics’ Andrew Kenningham wrote in a note that the issues in Credit Suisse again raise the question of whether this is just the beginning of a global economic crisis or another economic ‘idiosyncratic’ case.
Aftermath of Credit Suisse Fallout
Livemint reported today that Credit Suisse shares fell 25% on Wednesday. It hit a new record low, reflecting some increasing concerns that the initial troubles that had hit regional US banks may have migrated across the Atlantic.
Other big European banks had their hits. The bank shares in France’s two major international banks, which are BNP Paribas SA and Société Générale SA, both are down 10%. Shares in Deutsche Bank AG in Germany slid 8%. The head of bank research at Dutch lender ABN Amro, Joost Beaumont, said that the drop in Credit Suisse shares and bonds shows that the investors judge that this bank requires saving.
Prices on Switzerland’s Credit Suisse bonds fell sharply. Bid prices on the 2027 bonds on Tradeweb went down to 55 cents on the dollar. This is down from 72 cents the day before. They traded close to almost 90 cents at the start of the current month.
Before the Credit Suisse fallout, the bank had problems in the European banking sector for several years. It faced repeated scandals and financial losses.