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Credit Suisse's measures to ease investor concerns over potential contagion and a banking crisis have failed to lift market pressures, with the Asian markets remaining under pressure.

The bank announced it would borrow up to CHF50B from the SNB, calling it a "decisive action to pre-emptively strengthen its liquidity." The loan and a repurchase of billions of dollars of Credit Suisse debt aim to manage its liabilities and interest payment expenses.

Earlier, in a joint statement with the Swiss financial market regulator FINMA, the SNB assured the markets that the Credit Suisse had met "strict capital and liquidity requirements" and said, "there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market."

"If necessary, the SNB will provide CS with liquidity," FINMA and SNB said.

Hong Kong HSI gapped down today and is trading down -1.6% at the time of writing. From a technical perspective, the index's decline from 22700.85 is still ongoing, and unless the 55-day EMA (now at 20256.19) is breached, a further decrease is anticipated. Even as a corrective move, this drop could aim for the 100% projection of 22700.85 to 19783.07 from 21005.66 at 18087.88.

Summary

• European banks are in focus today with banking sector stocks under some pressure. In this report, we provide brief and aggregated metrics related to the stability of the Eurozone banking sector.
• The liquidity position of the Eurozone banking sector appears to have improved in recent years, as evidenced by a drop in the loan-to-deposits ratio (LDR). For countries participating in the Single Supervisory Mechanism (SSM), in Q2-2015 the LDR ratio stood at 126.6%, but by Q3-2022 that ratio had fallen to 104.8%, suggesting more of a balance between banks' deposits base and loans extended to customers.
• Eurozone banks in aggregate appear to be adequately capitalized. The broader Tier 1 ratio stood at 15.84% in Q3-2022, down from a peak of 16.67% in Q4-2020. However, capital ratios are well above the levels that prevailed at the time of the global financial crisis.
• From a policy perspective, if European banking sector difficulties were to worsen and have meaningful economic effects, it could curtail the extent of European Central Bank monetary tightening. However, at this stage we would view aggressive and emergency monetary easing from the European Central Bank to stabilize the banking sector as a low probability scenario.

Eurozone Banking Sector Solid, But Softening

After concerns surrounding the U.S. banking sector in recent days, European banks are in focus today with banking sector stocks under pressure. In this report we provide brief and aggregated metrics related to the stability of the Eurozone banking sector.

Overall, the liquidity position of the Eurozone banking sector appears to have improved in recent years, as evidenced by a drop in the loan-to-deposits ratio (LDR). For countries participating in the Single Supervisory Mechanism (SSM), in Q2-2015 the LDR ratio stood at 126.6%, but by Q3-2022 that ratio had fallen to 104.8%, suggesting more of a balance between banks' deposits base and loans extended to customers.

Meanwhile, Eurozone banks in aggregate appear to be adequately capitalized. The Common Equity Tier 1 ratio stood at 14.75% in Q3-2022, down slightly from a peak of 15.56% in Q4-2020. The broader Tier 1 ratio stood at 15.84% in Q3-2022, down from a peak of 16.67% in Q4-2020. While those capital ratios have softened moderately in recent quarters, they remain well above levels prevailing at the time of the global financial crisis. For comparison, the Tier 1 capital ratio stood at 7.96% in Q4-2007.

Considering the liquidity and capital position of the Eurozone banking sector, these dynamics should mitigate the chances of any broad based systemic issues across the Eurozone banking sector. That is not to say, however, that bank lending standards could tighten, and credit growth could slow—developments that could affect the outlook for Eurozone growth and inflation over the medium term. From a policy perspective, if European banking sector difficulties were to worsen and have meaningful economic effects, it could curtail the extent of European Central Bank monetary tightening. However, in our view at this stage we believe aggressive and emergency monetary easing from the European Central Bank to stabilize the banking sector is not that likely.

The collapse of the Silicon Valley Bank (SVB) on Friday brought chaos in the markets, with equity indices and government bond yields around the globe coming under strong pressure. This appeared to be the recipe of an elixir potion for gold, which rebounded strongly from near the $1,810 zone and skyrocketed. Is the metal poised to continue flying and what should its traders watch out for?

SVB collapse spreads panic

Markets were thrown into tailspin last Friday and on Monday this week, after a US lender, the Silicon Valley Bank (SVB), collapsed and spread panic among investors. Even after the prompt response of the Fed and the US Treasury to announce contingency plans, investors continued seeking shelter to safe-haven assets, something that allowed gold to shine again.

Another beneficiary this flight to safety was the US bond market, something that pushed Treasury yields off the cliff as market participants began scaling back their Fed hike bets in a panicked manner. Jitters eased somehow on Tuesday, but that appeared to be just a calm before another storm, which broke today on headlines that Credit’s Suisse’s largest investors, Saudi National Bank, will stop providing the bank with funds for capital. From expecting a terminal rate of around 5.65% after Fed Chair Powell’s remarks before Congress, investors are now split on whether the Fed will proceed with pressing the hike button next week, and more shockingly, they are seeing interest rates ending 2023 below 4% from their current 4.50-4.75% target range.

All eyes on the Fed

Ergo, at next week’s FOMC gathering, investors will be eager to find out, not only whether policymakers will deliver another quarter-point hike or not, but also how officials’ view and forecasts have been affected by the new crisis. That said, with Powell appearing in a hawkish suit just last week, and data just yesterday showing that underlying inflation accelerated in monthly terms during the month of February, it is very hard to envision that the new dot plot will match the market’s implied rate path and signal so many basis points worth of rate cuts. Therefore, the risks surrounding next week’s meeting may be tilted to the upside.

An outcome less dovish than expected could allow Treasury yields to rise, which may result in a retreat in gold, but one that may not be enough to erase all the SVB related gains, especially if the Fed’s projections are not as high as were expected before the turbulence. On top of that, there are more factors that could keep gold bulls in the game.

Chinese and Indian demand also important

One very important factor may be China’s reopening. Traditionally, China has been the world’s largest consumer of gold, with its jewelry demand falling below that of India during 2022 for the first time since 2011. This suggests that there may be ample room for recovery should the engines of the Chinese economy continue to speed up. Jewelry is the largest component of physical demand for the yellow metal, and thus, a strong boost by Chinese consumers could be of major importance. India is the world’s second largest nation in terms of consumption, seeing economic growth of almost 7% in 2022 and nearly 9% the year before. Thus, if economic activity continues to flourish there as well, demand for gold could substantially increase.

Risks seem tilted to the upside

Putting everything together, it may be very difficult to form a convincing long-term view on gold in such a dynamic environment where sentiment is switching from one extreme to the other within a few hours, but it seems that the risks may be skewed to the upside.

From a technical standpoint, gold emerged above Monday’s peak of $1,915 today, a move that may allow the bulls to put the high of February 2 at $1,960 zone on their radar. If they are strong enough to overcome that zone, they may extend their rally towards the psychological round figure of $2,000, also marked by the peak of March 8, 2022.

On the downside, the move signaling that the bears have stolen all the bulls’ swords may be a clear dip below $1,805, which is currently coinciding with the 200-day EMA. Such a move would confirm a lower low on the bigger timeframes and may see scope for declines all the way down to the low of November 23 at $1,725.

That said, for the bigger picture to turn back bearish, the Fed may need to appear nearly as hawkish as the market was expecting it last week, a scenario that may not be that likely considering that the Fed has pledged to assist in stabilizing the banking sector.

New Zealand's GDP fell by 0.6% in the December quarter, and the economy's momentum has slowed by even more than the headline figures suggests

• Quarterly change: -0.6% (last: +1.7%, Westpac f/c: -0.2%, market f/c: -0.2%)
• Annual change: +2.2% (Last +6.4%)
• Annual average change: +2.4% (Last: +2.7%)

The New Zealand economy's strong run through the middle part of 2022 was punctured at the end of the year. GDP fell by 0.6% in the December quarter, weaker than market forecasts of a fall of around 0.2%, and much weaker than the Reserve Bank's assumption of a 0.7% rise.

In fact the result was even softer than the headline number shows. Stats NZ has updated the way that it calculates the seasonal factors - a thorny issue in recent times, as the Covid pandemic and the border closure in particular has thrown off the usual seasonal patterns in activity. Today's result would have been a 1.2% decline using the old seasonal factors (as we did in our forecasts). Or to look at it another way, annual growth of 2.2% is a full percentage point lower than what we expected, and almost 2ppts lower than what the RBNZ was expecting.

The weakness was more broad-based than we expected, with declines in both the goods and services sectors. The biggest drag on activity was in manufacturing, down by 1.9%. Retail and accommodation, transport, and arts and recreation - all sectors that would have benefited from the return of overseas tourists - were also down overall, highlighting the degree of softening in domestic demand.

While the economy is widely expected to slip into recession as higher interest rates bite, we suspect that the December quarter results represent more of an air-pocket in our descent, rather than an earlier and harder than expected landing. Higher-frequency data has actually improved a little in the first two months of this year, and the clean-up from Cyclone Gabrielle will generate extra activity in the coming months that will add to measured GDP.

The crucial thing for the RBNZ, though, is that the starting point for the economy is substantially less stretched than they thought. And that matters for how much of a slowdown is needed to bring inflation back under control.

• USDCHF reversed from support level 0.9075
• Likely to rise to resistance level 0.9425

USDCHF currency pair recently reversed up from the strong support level 0.9075 (which has been repeatedly reversing the price from the middle of January).

The upward reversal from the support level 0.9075 created the daily Japanese candlesticks reversal pattern Morning Star.

USDCHF currency pair can be expected to rise further toward the next resistance level 0.9425 (which stopped the previous intermediate correction (2) with the daily Evening Star earlier this month).

• FTSE 100 index reversed from support level 7335,00
• Likely to rise to resistance level 7500.00

FTSE 100 index today reversed up from the powerful support level 7335,00 (which has been reversing the price from the middle of November) – standing well below the lower daily Bollinger Band.

The upward reversal from the support level 7335,00 stopped the previous sharp downward impulse wave (i) of wave C from the start of this month.

FTSE 100 index can be expected to rise further toward the next resistance level 7500.00 (former minor support which reversed the index earlier this month).

EURGBP has mostly been trading between the 23.6% and 50% Fibonacci retracement levels of the September-December 2022 downtrend over the past three months, but the lower bound of that range came under attack on Wednesday. Sellers swarmed into the market after the 20- and 50-day simple moving averages (SMA) caved in on the price.

The 20-day SMA is in the process of crossing below the 50-day one, while the Tenkan-sen and Kijun-sen lines of the Ichimoku cloud are sloping downwards too, pointing to an increasingly bearish bias. The momentum indicators are underlining the short-term negative picture. The stochastics are converging on the 20 oversold mark and the RSI is diving deeper below 50.

Immediate support comes at the 23.6% Fibonacci of 0.8712, which hasn’t been tested since mid-to-late December. A drop below it would instantly bring into view the 200-day SMA 0.8677, after which, the December 1 low of 0.8546 would be eyed by the bears.

However, if the sideways range holds and the price bounces off the 23.6% Fibo, a difficult battle lies to the north. The entire zone around the 38.2% Fibonacci of 0.8815 is surrounded with obstacles. Particularly, the 20- and 50-day SMAs and the cloud top at 0.8858. Even if these barriers are cleared, the 50% Fibonacci just below 0.8900 that forms the upper bound of the range could prove difficult to overcome. Not to mention the February top of 0.8978, which coincides with the 61.8% Fibonacci.

In brief, a break below the range’s lower bound would increase the risk of the neutral medium-term outlook turning bearish, and only a climb above the February top can sustain the weak positive trend in the longer run.

Markets

News this morning of a major Credit Suisse shareholder ruling out a capital injection in the ailing Swiss bank not only rekindled a still lingering fire, it fanned it into an roaring blaze. Investors are running towards the exit, concerned about a potential collapse and the repercussions of this systemically important bank on the broader financial system. European stocks indices wipe out yesterday’s sharp, dead cat rebound. The Euro Stoxx 50 drops about 3%, closing in on the 4K support area. Losses on WS range between 1.4-1.8%. Commodities went in a tailspin with the likes of iron and oil losing 1 to >3%. Brent ($74.8/b) is testing the December 2022 support. Cash is hurled towards assets considered to be safe havens, including gold (+1.3% to $1928/oz). US Treasuries and Bunds are going through the roof, though volumes are lower than on Monday and yesterday. Yields in the US tumble 18.4-44.3 bps with the front outperforming. There’s about 125 bps of rate cuts priced in by the end of the year. German yields implode by 21.9-41.8 bps with the 2y yield now effectively being below the ECB’s 2.5% deposit rate. European swap yields are down 13.8-22.6 bps, sharply widening the spread over German yields from the tightest in a year to the widest levels since November 2022 in just a matter of days. Peripheral spreads with the German 10y yield soar with Italy (+10 bps) and Greece (+18 bps) underperforming. Corporate CDS since last Friday have jumped by 100 bps in the high-yield segment and about 25 bps for IG companies. Both are at their highest levels since early December. Unlike the previous days, the dollar stands to benefit from the outright risk-off. Concerns have now spread to the other side of the Atlantic as well, potentially turning an initial US issue into a broader/global (?) one. The trade-weighted index jumps from 103.73 to 104.85. EUR/USD erased all dollar-driven gains since the SVB story hit the wires last Friday. The pair fell from a 1.076 high to 1.0547 currently. The Japanese yen outperforms everything and everyone. USD/JPY tested the 135 barrier this morning but now trades at 132.87. EUR/JPY (140.00) loses almost 5 big figures. Sterling holds up pretty well given the circumstances. EUR/GBP tested 0.872 support before rebounding a bit to 0.875 currently. At the open this morning, the pair hit an intraday high of 0.883. The pound obviously is no match for the USD but damage could have been way bigger. GBP/USD slips to 1.205. Not that it got any market attention, but UK MinFin Hunt loosened the belts a bit and unveiled a yearly £22bn (on average over the next three years) of fiscal stimulus in his budget presentation. He used the room made available by a less-worse-than-feared economic situation as the OBR no longer forecasts a recession this year.

News & Views

After a monthly decline in January (-1.1% M/M), inflation in Sweden again accelerated at a faster pace than expected. Headline CPI jumped 1.1% M/M bringing the overall price level to 12% Y/Y (11.7% Y/Y in January). The CPIF (CPI with a fixed mortgage interest rate), the preferred inflation gauge of the Riksbank (RB) rose 0.9% M/M and 9.4% Y/Y. CPIF ex energy showed an even bigger upward surprise (1.5% M/M to 9.3% Y/Y, was 8.7%). The uptick occurred despite a 0.4 ppts negative contribution from lower electricity prices. The numbers put further pressure on the RB to continue decisive monetary tightening at the April 26 meeting. In February, the Riksbank indicated to raise to policy rate to a cycle peak somewhere between 3.25% and 3.5%. It also signaled a further weakening of the krone is undesirable as it makes it more difficult to for the RB to sustainably return to the target. However, until now the RB engagement provided only limited support to the krone as the ECB also continued to tighten aggressively. EUR/SEK this morning gained modestly despite the global risk-off (currently EUR/SEK 11.20). Even so, this level of the krone probably stays well below what is needed to contribute to the RB’s efforts to tame inflation.

According to Statistics Poland, consumer prices in February rose 1.2% M/M 18.4% Y/Y. Goods prices increased 20.2% and services prices 13.3%. In a monthly perspective, the biggest contribution came from higher food prices (0.44 ppts). The 1.2% M/M rise was faster than expected, but a downward revision of the January inflation brought the Y/Y measure close to expectations. At last week’s policy meeting, the National Bank of Poland kept the policy rate at 6.75% as it hopes that inflation will gradually cool. The NBP also would like to see a stronger zloty in line with the economic fundamentals. The initially reaction of the zloty to the release was modest, but the Polish currency later in the session outperformed the region, despite the broader risk-off sentiment (currently EUR/PLN 4.69).

ECB faces mounting pressure to deliver a decisive response to the recent bank rout that is raising serious doubts on whether they will raise interest rates by 50bps tomorrow as previously indicated. Market expectations for a 50bps hike have dropped to less than 30%, with a 70% chance of just a 25bps hike.

In February's statement, ECB said explicitly that "the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March". However, the central bank has a recent history of overturning its intentions, leaving investors uncertain of their next move.

In June 2022 statement, it said "the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting". But then in July, it hiked the three key interest rates by 50bps.

But of course, that's just an "intention". ECB never pre-commits to any policy move.

EUR/USD is now close to completing a head and shoulder top, with left shoulder at 1.0733, head at 1.1032, and right shoulder at 1.0759. Theoretically speaking, firm break of the neckline should have confirmed the reversal pattern already. On the other hand, strictly speaking, the ideal short entry should be on recovery back to the neckline, which might never happen.

To take a middle, decisive break of 38.2% retracement of 0.9534 to 1.1032 at 1.0258 will be taken as confirmation of the reversal. 61.8% retracement at 1.0106 will be the immediate near term target.

Let's see whether ECB would help complete this technical formation.