Is it over? The reaction of equity markets yesterday which rose sharply, seems to indicate that investors believe the banking crisis is over. However, I’m sure a quick poll among market participants would show that nobody is comfortable with this idea. Yet the Nasdaq 100 recovered almost 2.7%. To understand the path that led to this very favorable close after a rather bright red Wednesday session, one has to consider the latest banking news and monetary news.

Most of the relief probably came from the banking sector. Thursday was marked by a double rescue. As early as the night before, it was known that the Swiss National Bank would rescue the country's second largest bank, Credit Suisse. Although the bailout was not presented as a blank check, it kind of is, which is causing the Swiss press to cringe. The bank seems to have done everything in its power over the last decade to sabotage itself, as successive managers have not been able to curb the unhealthy culture that had developed within the establishment. Authorities have no choice but to come to the rescue of Credit Suisse, but they are not doing so happily. It is rumoured that the Swiss government is considering a merger with UBS, but the institution is particularly reluctant to take over its rival. Credit Suisse ended up 19% yesterday. But even so, the stock has lost a quarter of its value in three months and 73% in one year.

The other event that drove the markets in the banking sector yesterday was the $30 billion rescue package sent by eleven US banks to their sister bank, First Republic, whose share price had fallen from $122 to $17.50 between March 6 and 13. The bank was the fourth candidate for bankruptcy after the disappearance of Silvergate, SVB Financial and Signature in one month. The domino effect was getting close to the bigger players (First Republic is the 14th largest US bank), so the "3Js", The US Treasury’s Janet (Yellen), JPMorgan Chase’s Jamie (Dimon) and the Fed’s Jerome (Powell) had to intervene. First Republic rallied 10% yesterday to $34. This is still a quarter of the value posted ten days before, but as for Credit Suisse, the plunge has stopped.

In addition to these two banking events, the markets welcomed the ECB's monetary policy decision yesterday. The central bank raised its main policy rate by 50 basis points to 3.50%, which was expected, although the turmoil in the banking sector could have blunted its convictions. It did not, but the markets seem to think that this could be the last turn of the screw. Instead, the more cautious economists believe that the ECB will continue to raise rates if some form of serenity returns to the financial sphere, and that it will back off with pragmatism if things get out of hand. Christine Lagarde, who has not always shone in the art of crisis communication, obviously did well yesterday.

Overall, investors were satisfied with the management of this mess. But all other things being equal, and to be the killjoy of the day, the situation on the morning of March 17 is still much worse than it was ten days before. We find ourselves with a banking crisis which has erased three major players and required the emergency rescue of two others. This is in addition to the big question that has been nagging at investors for months: will monetary policy allow inflation to ease without destroying the economic dynamic? And without destroying part of the banking sector, which has been fed with free money?

There will be a lot at stake in the Fed's decision on March 22. The U.S. central bank is expected to raise rates by a quarter point, according to CME's FedWatch tool, with a probability of 82%. The remaining 18% expect no change. Only ten days ago, the market saw a 50-basis point rate hike by a narrow margin.

This morning, the S&P 500 was down 0.4%, the Dow Jones declined 0.7% and the Nasdaq 100 was flat. Some volatility is to be expected since today is the 3rd Friday of the month, which is synonymous with a clearing session with the monthly expiration of equity and index derivatives. And since it is also the 3rd Friday of a quarter-end month, longer maturities are also coming due. It's called Witching Day, which is usually a source of volatility because strategies need to be adjusted.

 

Economic highlights of the day:

Industrial production and the University of Michigan's confidence index are today’s main indicators All the agenda is here. 

The dollar is worth EUR 0.9414 and GBP 0.8234. The ounce of gold remains firm at 1951 dollars. Oil is down again, with North Sea Brent at USD 73.13 per barrel and US light crude WTI at USD 67.14. The yield on 10-year US debt drops slightly to 3.54%. Bitcoin is strengthening around USD 26,600.

 

In corporate news:

* First Republic Bank, which announced a dividend suspension, fell 12.1% in pre-market trading on Friday after jumping 10% the day before following the announcement of 30 billion in aid from several large U.S. banks as they try to avoid a domino effect after several banks failed last week.

* Fedex jumped 11.6% in premarket trading as the company raised its earnings-per-share forecast for this year to a range of $13.80-14.40 from a previous estimate of $12.50-13.50.

* Amgen on Thursday announced plans to cut 450 jobs, or less than 2 percent of its workforce, the company's second layoff plan this year, amid mounting pressure on drug prices and high inflation.

* Merck & Co was down nearly 1% in after-hours trading after announcing that its treatment for metastatic non-small cell lung cancer failed in a clinical trial.

* Baidu gained 5.2% in pre-market trading after authorities granted a license for a robot cab service in Beijing.

* United States Steel climbed 4.8% in premarket trading after it reported adjusted first-quarter net income above analysts' expectations.

* Groupon fell 6.3% in premarket trading after reporting a fourth-quarter adjusted net loss per share of $0.38 versus earnings of $0.18 a year earlier.

 

Analyst recommendations:

  • Alphabet: Exane BNP Paribas upgrades to outperform from neutral. PT up 23% to $123.
  • Applied Industrial: Baird raised its recommendation to outperform from neutral. PT up 19% to $160.
  • Bread Financial Holdings: Keefe, Bruyette & Woods downgrades to market perform from outperform. PT up 11% to $35.
  • Chubb: J.P. Morgan upgrades to overweight from neutral. PT up 25% to $239.
  • FedEx: Susquehanna Financial raised its target on FedEx Corp. to $225 from $170. Maintained its neutral rating.
  • Fidelity National: Keefe, Bruyette & Woods upgrades to outperform from market perform. PT up 34% to $70.
  • Foot Locker: Citi raised its target  to $47 from $38. Maintained its neutral rating.
  • GSK: Deutsche Bank upgrades from hold to buy targeting GBp 1700.
  • Iqvia: Truist Securities initiated coverage with a recommendation of buy. PT up 35% to $265.