Global bond yields and EU/UK equities plummet as fear levels jump. EUR crunched as ECB’s pre-committed 50bps hike seems unlikely

By Stuart Talman, XE currency strategist

Banking sector contagion risks have rocked financial markets through Wednesday’s offshore sessions, a wave of risk aversion sweeping across risk assets as concerns migrated across the Atlantic.

News that Credit Suisse’s largest shareholder, the Saudi National Bank would cease providing further financial support sent shares of the troubled Swiss bank into freefall, at one point down over 30%, an astoundingly scary move for a major international bank.

European bourses fell in an ugly session as investors raced to deleverage amidst growing concerns of a widespread financial crisis, the Dax, Euro Stoxx 50 and FTSE’s declines approaching -4%.

Global bond yields plummeted as the case for central banks’ to pause their respective tightening cycles grows, now faced with the dilemma of having to choose between continuing the inflation battle which is far from over, or ease financial conditions to avoid a broader banking crisis.

The flight to safety has propelled the Japanese Yen to the top of the G10 leader board whilst the euro sits in the bottom third, falling on expectations that the ECB’s pre-committed 50bps hike is now off the table, bets being placed on either a 25bps move or a hold.

Marking highs at 1.0760 prior to the Credit Suisse headlines, EURUSD declined close to 2% to trade in the low 1.0500’s.

The New Zealand dollar has fared better relative to its G10 peers, falling less than 1%, logging an overnight low a few pips above 0.6170. Earlier in the day, NZDUSD looked poised to re-test key resistance at 0.6270, but failed in the Asian afternoon, falling decisively through European trade.

Forming a double top near 0.60 in January, NZDEUR had fallen around 4% through 1Q, marking 5 month lows (MON.) a couple of pips below 0.5750 as a late-to-the-party ECB is now positioned as the most hawkish central bank amongst the cohort of developed nations.

The ECB was widely expected to raise the prime policy rate by 50bps to 3.50% this evening…..market pricing now assigning just a 20% chance of a half-a-percent move.

This re-pricing has catapulted NZDEUR higher, climbing from near 0.5780 to log Wednesday’s overnight high at 0.5890, the highest the pair has traded over the past four weeks. Upside risks remain given the potential for ECB President Lagarde to deliver no hike in the early hours of Friday morning.

Heading into the second half of US trade, US equities are attempting to base, at its nadir, the S&P500 was down around 2%, the rate sensitive Nasdaq performing materially better amidst the big drop in bond yields, down around three-quarters-of-a-percent.

Unlike the troubled regional US banks such as Silicon Valley Bank and Signature Bank, Credit Suisse is a global problem due its size, greater diversity (relative to SVB) and the interconnected nature of global banking. With US$574 billion in assets, Credit Suisse is over twice the size of SVB and has long been seen as the weakest link among Europe’s large banks.

Credit Suisse has struggled with stagnant profitability in recent years and has faced multiple scandals during this time. Last year it was convicted in connection with a money laundering program involving a global drug ring whilst connections with a collapsed hedge fund and a bankrupt British lender further tarnished the reputation of Switzerland’s second largest bank (behind UBS).

Last month Credit Suisse reported its largest annual loss since the GFC as clients pulled more than $100 billion in assets through the final quarter of 2022.

The cracks are widening.

Looking to the day ahead, the market’s attention will remain intensely focused on banking sector related news flow as fears grow that a domino-effect will rip through the global economy.

The ECB rate decision (0215) and Lagarde’s presser 30 minutes later is the major scheduled event.

It should prove an eventful local session as the release of 4Q GDP for the local economy and Aussie jobs numbers influence the antipodean cross’s short-term direction. The Kiwi continues to outperform the Aussie reaching a near 3 month high in the 0.9360’s, on track for a fourth consecutive week of gains.

The market’s nerves are fraying, crisis alert mode has been activated – settings that are not conducive for New Zealand dollar outperformance.

Having swiftly rejected the opportunity to move back up through 0.6270 resistance, the key near-term support zone for NZDUSD is 0.6130/50 which contains prior support and the 38.2% Fibonacci retracement of the October – February rally.

Below here, last week’s stoic support, located near 0.6090, is a critical inflection point. A decisive break below here amidst further deteriorating confidence in the global banking sector – the Kiwi very could trade sub-60 in the days ahead.

Importers, I know these aren’t attractive levels, but you need to be wary that the probability of a rapid downside washout is growing.

Stuart Talman is Director of Sales at XE. You can contact him here.