This week started with a bang with the news that UBS had agreed a deal over the weekend to acquire Credit Suisse (CS) for around $3bn. Only two years ago, the market capitalisation for CS was around $34bn. The deal brings an end to CS’s recent woes where a flurry of regulatory fines, mismanagement and loss of confidence led to assets and deposits rapidly declining. The bank can trace its roots back to 1856 and alongside UBS had been a flagship company for Switzerland.
One of the surprising elements of the deal was that holders of Credit Suisse AT1 bonds have effectively been wiped out, while shareholders were not. CS had issued approximately $17bn of AT1 bonds and rumours are circulating that bondholders are preparing a lawsuit against the Swiss regulator.
Following on from the emergency takeover of CS, all eyes were on central banks this week, who were due to meet and set interest policy. The concerns around the banking sector were not enough to deter central banks from raising interest rates further. The US Fed and UK’s Bank of England both raised rates by 0.25%, but struck a cautionary tone, acknowledging that higher rates are impacting the economy. At this moment central bankers are walking a tightrope, trying to bring down inflation through higher interest rates, while not causing financial instability.
UK inflation data, released on Wednesday, provided an unpleasant surprise, coming in at 10.4%, against an expectation of 9.9%. The uptick in inflation (previous month 10.1%) was driven by food and non-alcoholic drink prices, which rose at the fastest pace in 45 years.
The big winners this week were defensive assets, with government bonds and gold performing strongly. Bonds rallied (yields fell) on the expectation of lower future interest rates. The gold price has passed through $2,000 per oz this week. The precious metal is often viewed as a safe-haven asset and the price of gold does well when real yields fall – something we have witnessed this week.
Equity markets have been mixed this week, with UK and European equities struggling for momentum by the end of the week. It’s pleasing that the inverse correlation between bonds and equities has returned recently, something that was missing in 2022.
It was banks, a strong sector in 2022, that was bearing the brunt of the pain on Friday, a sign that central banks measures to calm markets may not yet be sufficient. Another strong performer in 2022, the energy sector, has also been weak of late; the oil price has fallen on the back of a more uncertain economic outlook which has fed through to underlying share prices.
The strong relative performance of Apple and Microsoft in recent weeks, the two largest companies in the US, has seen their combined weight reach 13.3% of the S&P 500 – the highest level on record. That means for every $100 invested into the S&P 500, $13.30 goes into just two companies. Within the global equity index, Apple now has a bigger weight than the whole of the UK market!
This week may end up being remembered for two major events; the demise of Credit Suisse, and potentially the end of the interest rate hiking cycle, with the real possibility the US Fed (and Bank of England) may well pause, before potentially cutting rates later in 2023.
Andy Triggs, Head of Investments
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