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Currency Volatility Snaps Higher on Suisse Miss

World markets are coming under renewed selling pressure this morningas signs of a banking contagion spread to Europe. Equity futures are setting up for drastic losses at the open, Treasury yields are down across the curve, and the dollar is pushing higher against its G10 rivals. Oil prices are tumbling, with the West Texas Intermediate benchmark slipping below $70 for the first time since September 2021. 

A fragile sense of calm was broken when shares in Credit Suisse Group AG plunged and credit default swap prices shot up after it said “material weaknesses” had been found in its reporting. Selling worsened when the head of Saudi National Bank, the group’s largest investor, ruled out providing additional support in a Bloomberg TV interview, saying “The answer is absolutely not, for many reasons outside the simplest reason which is regulatory and statutory”.

We’re struggling to place the group’s troubles in the context of a global banking crunch: Higher rates are squeezing profitability across the sector, but Credit Suisse has been troubled for years, with share prices repeatedly hitting new lows through much of the post-pandemic period. In just the last three years, executives have presided over a spying scandal, billions in losses on Greensill and Archegos, a cocaine cash laundering conviction, and extensive risk control failures involving funding to Russian oligarchs. Its balance sheet remains roughly twice as large as Silicon Valley Bank’s, but interest rate exposures are minor in comparison, and from a market capitalization perspective, it is now a relatively small player.

To sum up, central banks may be raising rates until something breaks, but one could argue that Credit Suisse was already broken. 

The euro is weakening as bank indices plunge and investors suffer flashbacks to the 2011 euro crisis. Odds on a half percentage point hike at tomorrow’s European Central Bank meeting—considered a near-certainty only yesterday—are slipping, with a smaller move looking increasingly plausible. Rate expectations are coming down across the curve as financial stability risks look set to trump inflation concerns in determining the rhetorical approach taken by policymakers.

Ahead of Chancellor Jeremy Hunt’s first budget, futures pricing suggests odds on a half-percentage-point hike at next week’s Bank of England meeting have fallen below coin-toss levels. The government’s fiscal plan has been substantively leaked at this point, and is considered unlikely to fully offset the risks associated with a weakening growth outlook when the Monetary Policy Committee deliberates.

Economists think retail sales slumped -0.4 percent month over month in February, pressured by falling vehicle purchases and an ongoing recovery in services. Spending surged a seasonally-unusual 3 percent in January as job growth soared and Social Security benefits saw the largest cost-of-living adjustment in at least four decades. Producer prices are seen rising 0.3 percent in February from the prior month.

Odds on a quarter-point rate hike at next week’s Fed meeting had recovered ahead of this morning’s turmoil—nearing 80 percent—but are now slipping back as global spillover risks threaten to impact domestic monetary policy settings. The dollar looks set to continue its stampede through currency markets nonetheless.

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