Macro Digest: European banks and liquidity risk driving this latest round of turmoil

The biggest long position in the market is long European Bank Stocks based on rising interest margin and the perception of improving conditions. Their sharp sell-off is a major LIQUIDITY RISK to this market…..

I have commented extensively on this banking issue, and the lack of real solutions from Fed. To me the Silicon Valley Bank (SVB) meltdown and bankruptcy was the Bear Stearns of 2007 when they told market they had ample liquidity and then saw two funds blow up, followed by the end of the bank as it was sold for pennies on the dollar to JP Morgan Chase. Market rallied 4.8% back then (we did 2.5% yesterday) and think it feels like 15%.

The key development here is that interbank market sees liquidity drying up (much higher volatility) after the Credit Suisse story – long developing, but now accelerating as of this morning and discussed below.

The first rule of investing is that the return OF money is more important than the return ON money. Market figuring this out the hard way today.

Fundamentally the ignition of this morning sell-off was the Credit Suisse headline:

https://www.reuters.com/business/finance/credit-suisse-shares-drop-fresh-record-low-cds-widen-2023-03-15/

The CDS of Credit Suisse is now same level as when Deutsche Bank faced the same existential issues.

On the “too big to fail” concept – remember Credit Suisse is really two companies – CS AG, which is too big to fail, but 100% Swiss entity and CS International, which has no such guarantees.

https://www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2022/10/strategy-update-press-release-en.pdf

Here are quick overview charts to show the market “pain” (note that Credit Suisse CDS prices are on the left axis).