Race to reassure markets with rescue deal for Credit Suisse: S&P 500, Hang Seng Index, USD/SGD

Market Recap

The race to reassure markets over the recent global financial instabilities continues over the weekend, as a rescue deal for Credit Suisse was hurried, which reflects the urgency of the situation for the bank that is deemed to be systematically important. UBS will pay 3 billion Swiss francs for Credit Suisse and assume up to $5.4 billion in losses, supported with a $100 billion credit line from Swiss National Bank (SNB).

The deal will trigger a “complete write-down” of the bank’s additional tier 1 bonds as an effort to mitigate some losses, while the CHF0.76 per share deal translates to a 59% discount from the last closing price of Credit Suisse. The move to backstop further contagion risks by the Swiss authorities may aid to better the financial situation of Credit Suisse, but near-term, the “forced” deal could potentially bring some downward pressure for UBS’ share price.

Additional efforts were also enacted by the Federal Reserve (Fed), which allows other central banks to gain access to US dollar through daily currency swaps. The improvement to its original facility is a move to “minimise the risk that strains abroad could spread to US markets”. US equity futures reacted positively to the news this morning, coupled with the UBS’ buyout of Credit Suisse, but it seems more of a cautious optimism at the moment. Gold prices saw some unwinding of previous safe-haven flows (-0.71%) but remained near its 11-month high, while risk-sensitive currencies saw some recovery.

For the S&P 500, it continues to hang above a longer-term downward trendline, but the risks of the formation of a lower high remain. Greater conviction for the bulls may have to come from a move back above its key 4,000 level, where a Fibonacci confluence zone stands, along with its 200-day moving average (MA). The Fed meeting this week will be the key risk event. Any deviation away from a 25 basis-point move could potentially reignite market jitters, with the upcoming dot plot to reveal whether recent less hawkish pricing by the markets is being one-sided.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.39%, ASX -0.37% and KOSPI -0.04% at the time of writing. Initial reaction for the financial banks in the region to the UBS’ buyout of Credit Suisse seems to point to more measured gains, suggesting a still-cautious environment as sentiments remain on hold for further developments in the banking space. Last Friday, the People’s Bank of China (PBOC) delivered a surprise announcement to cut the reserve requirement ratio (RRR) for almost all banks by 0.25 percentage point, effective 27 March.

The timing seems to fall in line with recent global banking jitters, which suggests that the PBOC is on high alert to provide any cushion against any knock-on impact from recent turmoil. Chinese equities delivered some resilience to end last week, with the Nasdaq Golden Dragon China Index just down slightly by 0.33% compared to the S&P 500’s -1.1%. All eyes will be on whether there will be any changes to its one-year and five-year loan prime rates, but further adjustments on that front still seems like an unlikely scenario.

The Hang Seng Index continues to hang around its key 200-day MA, being forced into a range but at least a slight turn in its moving average convergence/divergence (MACD) suggests some easing downward pressure for now. Greater conviction for the bulls may have to come with a move back above its 200-day MA, which could leave the 19,700 level on watch ahead.

On the watchlist: USD/SGD stalls ahead of FOMC meeting and Singapore’s inflation release this week

After a 4% recovery since February this year, the USD/SGD has been forced into a range, with a bearish crossover on MACD pointing to some moderation in upward momentum. A near-term head-and-shoulder formation seems to be in place as well, with recent downside prompting the pair to retest the neckline at the 1.341 level. Key focus will be on the Federal Open Market Committee (FOMC) meeting this week, where expectations are for the Fed to take on a less hawkish stance in rates. Singapore’s inflation rate will be released as well, with pricing pressures expected to show further persistence with a move to 5.7% from the previous 5.5%. The confluence of both factors may be headwinds for the pair, with any breakdown of the neckline suggesting that a move to retest the 1.322 level may be in place.

Friday: DJIA -1.19%; S&P 500 -1.10%; Nasdaq -0.74%, DAX -1.33%, FTSE -1.01%