Weekly Market Wrap | 25 March 2023

#UBS-CS #25bpsHike #TikTokTestimony

Topic #1: UBS acquires Credit Suisse

Credit Suisse, one of the world’s largest banks, has been taken over by its long-time rival UBS for  $3.25 billion. The acquisition, which was announced on March 20th, marks the end of an era for Credit Suisse, which had been in business for 167 years. The deal will see each shareholder of Credit Suisse receive 1 share in UBS for every 22.48 Credit Suisse shares they hold.

Why did it happen?

Credit Suisse has been struggling with a series of challenges in recent years, including its association with failed companies such as Greensill Capital and Archegos Capital Management. The collapse of Silicon Valley Bank had further exacerbated the bank’s woes, causing investors to look for signs of contagion.

Moreover, the largest shareholder of Credit Suisse, Saudi Arabia Bank, had announced that it would not be adding to its investment due to regulatory requirements, adding to the already mounting concerns among investors about the bank’s financial stability. This led to a surge in the credit default swaps with investors looking to safeguard themselves from a possible default.

What happened next?

Central banks worldwide have moved to reassure investors that the financial situation is much better than during the 2008 financial crisis, with improved liquidity ratios. They have also acted to calm the markets which were facing high levels of volatility by providing dollar liquidity to stabilize the situation. However, investor attention has shifted to the blow that some Credit Suisse bondholders will face, leading regulators to try to prevent a market rout for convertible bank bonds. Some of these bonds have dropped to zero value (AT1 Bonds), while equity shareholders are still going to be paid.

Topic #2: Fed increases rates by 25-bps

Interest Rate over the year

The Federal Reserve Board’s Federal Open Market Committee (FOMC) announced on March 22 that it would raise interest rates by a quarter point, marking the ninth rate increase since March 2022. 

The Fed faced the difficult task of balancing inflation and stabilizing a turbulent banking sector, which has made American consumers uneasy in recent weeks. At a press conference, Fed Chair Jerome Powell stated that officials had considered a pause leading up to the meeting but decided against it. The Fed’s main focus still remains on curbing inflation. Powell mentioned that the committee will continue to closely monitor incoming information and may implement additional policy firming to return inflation to 2% over time. 

While the Fed stated that the U.S. banking system is “sound and resilient,” it acknowledged that recent developments could result in tighter credit conditions for households and businesses, affecting economic activity and inflation. Powell also noted the need for more regulatory supervision in light of the recent bank runs, which were faster than those seen in the past. 

What does it mean for you?

Powell’s recent statements have drawn attention to the uncertainty prevailing in the market. The focus on inflation may lead to further rate hikes if it fails to show signs of cooling down. This could add pressure on bond values in the short to medium-term and potentially affect the financial sector, resulting in unrealized losses. However, the rate-hike indicates that the Fed is not overly concerned about the current financial crisis and is better prepared than 15 years ago. Asset classes may experience higher volatility in the short to medium-term, making a diversified portfolio crucial for navigating through these times.

Topic #3: TikTok CEO testifies to address app ban

The CEO of TikTok, Shou Zi Chew, recently appeared before the Congress to warn against the potential ban of the app in the US. Chew argued that TikTok is a platform where people can be creative, and that close to five million American businesses, mostly small, use it to find customers and drive growth. He emphasized that the app offers privacy and security guarantees and that it is run by an executive team in the US and Singapore, with headquarters in Los Angeles and Singapore. 

Despite these assurances, some lawmakers remain skeptical and have presented bills seeking to ban the app in the US. They argue that the fact that ByteDance has Chinese founders raises suspicions about whether TikTok could be used as a tool by the Chinese Communist Party. Republicans said that they do not trust that TikTok will ever embrace American values and that the platform should be banned.

In an attempt to dispel these doubts, Chew highlighted that TikTok is subject to US laws and has implemented the Texas Project, which ensures that Americans’ data is stored in the United States and hosted by a company based in that country. They have also hired Oracle, a leader in cloud-based services, to ensure that only staff of a new unit of the firm, TikTok US Data Security, can access that data. Chew argued that TikTok is the only company in the industry that offers this level of transparency.

In conclusion, while Chew’s appearance before Congress was an attempt to reassure lawmakers about TikTok’s security and privacy measures, it remains to be seen whether these assurances will be enough to prevent the app from being banned in the US.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)3,971+1.37%-0.28%+3.84%
Nasdaq 100 (US Tech Stocks)12,767+2.24%+5.88%+17.53%%
CSI-300 (Chinese Stocks)4,027+1.62%-0.42%+3.58%
Bitcoin (in USD)27,568-0.92%+18.96%+66.02%

Source: Financial times, ManaFN, Google Finance

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