South African rand plummeted on Wednesday along with shares

Reuters: South African rand plummeted along with shares on Wednesday as the U.S. banking crisis spread to Europe and continued to wreak havoc on global markets.

South African Rand plummeted

The country’s blue-chip Top 40 and its broader all-share indexes fell around 3% to the lowest they have been this year. “My big fear is that it leads to a crisis of confidence, that’s more of an issue than the reality of what’s happening to the banks,” Sasfin equity strategist David Shapiro told Reuters, referring to the falling stocks. Among fallers, shares in the banking sector slipped 2.78%, reflecting global market sentiment.

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This decline comes after Credit Suisse’s biggest investor said it was unable to increase its stake, citing regulatory issues about the size of its holding. At 1608 GMT, the rand traded at 18.4025 against the dollar, 1.56% weaker than its previous close. Data from Statistics South Africa showed retail sales fell 0.8% year on year in January after falling by a revised 0.5% in December.The country’s benchmark 2030 government bond slipped in afternoon deals, with the yield up 3 basis points at 10.045%

British Pound

Reuters: The British pound fell against the dollar but surged against a tumbling euro on Wednesday as markets fretted about the state of the European banking system as the fallout from the collapse of U.S. tech lender Silicon Valley Bank gathered pace. Shares in Swiss lender Credit Suisse plummeted more than 30% at one stage after its largest investor said it could not provide more financial assistance to the bank. The slide led the wider European banking index lower, triggering demand for the safe-haven dollar and away from high-beta currencies such as the pound. But worries of another European banking crisis were also weighing on the single currency. The euro was 1% lower against the pound at 87.42 pence, after earlier dropping to 87.19 pence, its lowest level since Dec. 20, 2022.

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“The focus has shifted from a U.S. banking story to the Credit Suisse story and markets are assessing the ramifications of possible contagion,” said Francesco Pesole, FX strategist at ING. “Markets are seeing the euro zone markets likely hit first and British markets to be slightly more shielded, so it makes sense that the euro is performing worse than the pound at this stage.” The pound was last down 0.7% against a broadly stronger dollar at $1.2070, having hit a one-month high of $1.2203 on Tuesday. The dollar index, which measures the currency against a basket of six others including the pound, was up 1.1% at 104.86.

Traders now see the Bank of England pausing rate hikes as the most likely outcome at its March policy meeting. Investors see around a 40% chance of a 25 basis point hike and around a 60% chance they keep rates unchanged. Last week, the chance of a BoE rate pause stood at around 10%. Focus was also on Westminster where British finance minister Jeremy Hunt announced a fiscal plan that he hopes will speed up Britain’s stagnating economy, while upgraded economic forecasts showed the economy would now avoid a recession this year. “Other events have stolen the headlines but this was never likely going to be a headline reaching budget anyway,” said Jane Foley, head of FX strategy at Rabobank.

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US Dollar

Reuters: The dollar rose on Wednesday on safe-haven buying after Credit Suisse’s stock tumbled following the disclosure of “weaknesses” in its financial reporting that renewed investor concerns that a full-blown global banking crisis may be brewing. European currencies fell sharply against the dollar, with Credit Suisse shares plummeting 24.2% after its biggest investor, citing regulatory issues about the size of its holding, said it was unable to increase its stake. Credit Suisse’s 2022 annual report published on Tuesday cited “material weaknesses” in internal controls over financial reporting, noting that it had not yet stemmed customer outflows. Concerns about the Swiss bank led the European banking index to fall 6.9%, its biggest one-day drop in nearly 13 months, and triggered a plunge in European and U.S. bond yields. Investors question whether the Federal Reserve and other central banks can keep hiking interest rates to curb inflation.

“The concern with Credit Suisse is whether or not this is going to turn into a full-blown global banking problem,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto. “It really looks like central banks are caught between a rock and a hard place between tightening policy to address issues in the real economy and then, of course, the spillover effect is the fact that there’s a financial side to that.” Credit Suisse’s difficulties are different than the failure of Silicon Valley and Signature banks, said Mark Stoeckle, chief executive and senior portfolio manager at Adams Funds in Baltimore. “Everybody has been watching with a front row seat the mismanagement of Credit Suisse for years. So it is different,” he said. “But it is still bringing in the unknown which the market always hates.” The dollar index , which measures the U.S. currency against six others, rose 0.925% and the euro fell 1.42% to $1.058. Higher Treasury yields than other government debt have driven dollar strength this year.

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The dollar also rose 1.94% against the Swiss franc , while sterling traded down 0.83% at $1.2057. The Japanese yen strengthened 0.72% to 133.24 per dollar. “This is two-fold: there’s just a massive flight to quality, safe-haven buying, and the other is a repricing of rate hike expectations,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “We’ve had this dramatic change in pricing for what the Fed is going to do and that’s in conjunction with the actual buying, and the reason why the focus is on the two-year” note, he said. Fed funds futures, which reflect the overnight rate that banks use to lend to each other, plummeted. The December contract tumbled to 3.767% from about 5% a week ago, with a potential rate cut now seen in June.

World Markets

Reuters: Markets took a moment’s respite on Thursday after Credit Suisse said it would borrow as much as 50 billion francs ($53.7 billion) from the Swiss central bank to steady itself, but trade was very tense as investors worried where banking stress might show up next. Asian shares fell but without the frenzied drops seen overnight in Europe. European futures were last up 2%, while S&P 500 futures rose 0.5%. Any relief was tinged with fear of what may go wrong next. A week ago a start-up lender in California failed and now a systemic bank in one of Europe’s financial capitals is in enough trouble to seek authorities’ help. Credit Suisse shares dropped 24% on Wednesday. Safe assets like bonds, gold and dollars were in favour. “I think we’re getting into the hard hat territory again,” said Damian Rooney, a dealer at Perth stockbroker Argonaut. “The word contagion is knocking about, we’re getting fear across the whole board here,” he said. “The trouble is with the unwinding – you don’t know what you don’t know.”

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MSCI’s index of Asia-Pacific shares outside Japan fell 1% to its lowest this year. Japan’s bank shares recovered some even deeper early losses, but were last down 4% and the Nikkei dropped 1.3%.Insurers, banks, miners and consumer stocks were among the biggest losers across Asia’s markets as worries grow that a potential credit crunch can worsen a looming economic slowdown. Selling pressure eased for commodities and buying in gold, bonds and dollars backed off but without really recovering any of the losses in growth-exposed assets or handing back much of the astonishing gains that have been seen in bond markets. Bonds have soared while markets have radically re-priced the interest rate outlook, betting central banks will be quickly cutting rates while stability fears rattle the financial system. Two-year U.S. Treasuries are eying their best week since 1987 and yields, which fall when prices rise, are down more than 66 basis points since Friday.

An index of bond market volatility – the ICE BofA MOVE index – has hit its highest level since the 2008 financial crisis. The European Central Bank’s meeting later on Thursday looms as a big test of the bond rally, as the first scheduled policy announcement since bank jitters began in the U.S. last week. ECB policymakers had flagged a 50 basis point hike and President Christine Lagarde was just this month saying it was very likely. But market pricing implies just a 10% chance of that happening now and traders are on edge about the outcome. “We’ve got to get through ECB and see how that goes down. And then the impact of that may well impact on what we think about the Fed next week,” said ING economist Rob Carnell. “I think it’s going to be a very volatile period until we get this out of the way…it feels like at these interest rate levels the risk of finding that you’ve lifted a stone and something ugly is underneath gets higher.”

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The euro and Swiss franc found some support from the central bank’s help for Credit Suisse, steadying after steep overnight drops. The euro last stood at $1.0601 and the franc at 0.9300 to the dollar. The flight to safety lent support to the yen and it rose about 0.5% to 132.75 per dollar. The New Zealand dollar fell 0.4% to $0.6161 after growth data missed forecasts.

Published by the Mercury Team on 16 March 2023

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