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Europe & ECB Update | HF Analysis


The markets are again lowering bets on the FOMC’s rate path as financial stresses surge again. And they are taking on a global flavor as turmoil with Credit Suisse reflects a potentially widening problem of a systemic nature after the seemingly more idiosyncratic woes with SVB, Signature Bank, and Silvergate Bank. Indications of poor regulation have added to diminishing credibility of central bankers. And now the ECB and FOMC are between rocks and hard places as they need to balance the risks of worsening the stresses in the financial system against still high inflation.

After largely promising further tightening in rates, and a jumbo 50 bps from the ECB, do they back off now and either slow or halt hikes? That could be interpreted as a sign of panic from policymakers.

European stock markets have sold off. A top shareholder of the Credit Suisse ruled out more assistance, which hit confidence in European bank stocks. Credit Suisse had revealed yesterday that auditor PwC identified “material weaknesses” in its financial reporting controls, and the chair of the Saudi National Bank, which last year bought a 10% stake in Credit Suisse, ruled out further provision of financial assistance today. SNB cited regulatory reasons and argued that the bank doesn’t need more funds, but investors still reacted nervously amid concern that European banks are sitting on a large pile of unrealised losses after the slide in bonds over the past year.

The GER40 dropped below the 1500 level and is down -2.6% on the year. The UK100 has lost -2.9 bp. Bonds rallied as markets adjusted tightening expectations and the German 10-year rate plunged 30 bp to 2.16%, while the UK 10-year slipped nearly 20 bp to 3.295%. The short end underperformed and the German 2-year Schatz yield fell 46 bp to 2.47%.

The ECB is still likely to deliver the 50 bp hike it flagged already at the last meeting, but a downgrade of the move cannot be ruled out and Lagarde will certainly deliver a cautious press conference as markets remain extremely nervous and Eurozone spreads widen. The pressure on European banks will likely translate into a very cautious press conference and a downgrade of the move can no longer be ruled out. The ECB already committed to a 50 bp hike at the last meeting and a cancelation would likely be interpreted as a sign that the Eurozone’s financial system is indeed under threat, which would only fuel volatility in markets.

Check our article below for more info, regarding the economic outlook of Eurozone!



However, the chances that the ECB will commit to several more substantial hikes have faded as markets start to focus on the substantial unrealised losses that many banks hold on their balance sheet following the sharp slide in bonds. Overly aggressive central bank action would only add to those problems and the selloff in stocks and the widening of Eurozone bond spreads will give the doves something to argue with tomorrow. It will also strengthen their case for a watered down “guidance” on the future outlook. We still expect Lagarde to signal that in the central scenario more tightening is underway, but without committing explicitly to the timing and size of additional steps. Data dependency and flexibility will seem particularly important in the face of very nervous markets.

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Andria Pichidi

Market Analyst

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