Comment of the Day
15th March 2023
Eoin Treacy
Video commentary for March 15th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Credit Suisse accelerates lower, oil pares decline, natural gas weak, Wall Street steadies, Dollar, gold and yen firm suggest demand for safe havens is rising.
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Credit Suisse Needs Capital Raise or Breakup, Morningstar Says
This article from Morningstar may be of interest. Here it is in full:
Credit Suisse Group AG (NYSE:CS)’s funding costs have become so high it either needs to raise more capital or face a break up, Morningstar analyst Johann Scholtz said in a note on Wednesday.
“We expect the 2023 loss to increase to such an extent that its capital adequacy could be under threat,” Scholz wrote in the note. “We believe Credit Suisse needs another rights issue.”
The alternative would be “a breakup” of the bank in which its various business lines such as the Swiss unit, asset manager and wealth management divisions could be “sold or listed separately.”
Credit Suisse has sufficient liquidity to handle the outflow of deposits and should also be able to get emergency liquidity from the Swiss National Bank by borrowing against its bond portfolio, Scholz wrote in the note. “However, this does not solve Credit Suisse’s profitability challenge, nor does it address capital concerns.”
Credit Suisse’s stock plunged as much as 30.8% on Wednesday to the lowest level on record, while some of its bonds dropped to levels that signal financial distress as the company’s top shareholder ruled out increasing its stake because of regulatory constraints. The plunge helped drag all European lenders lower as investors were quick to move away from banking risk after turmoil induced by the collapse of California-based Silicon Valley Bank.
The Swiss lender’s Chief Executive Officer Ulrich Koerner on Tuesday preached patience and said the bank’s financial position is sound while Chairman Axel Lehmann said Wednesday that government assistance “isn’t a topic.” He also said it wouldn’t be accurate to compare Credit Suisse’s efforts to return to profitability with the recent collapse of Silicon Valley Bank.
Eoin Treacy's view
A decade of negative deposit rates hollowed out the business models of many banks. That left the holders of bonds in a uniquely unfavourable position as interest rates backed up. Tighter liquidity conditions make every type of leveraged bet look foolish. Credit Suisse resorted to taking risky bets which have come undone one after another over the last few years as the pandemic and inflation drove risk premia higher.
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Budget key points: All you need to know about Jeremy Hunt's spring statement
This article from the Independent may be of interest to subscribers. Here is a section:
Defence budget and levelling up
Mr Hunt confirmed the government will add £11 billion to the defence budget over the next five years and another £30 million is being allocated for veterans.
There will be 12 new investment zones, and they will potentially be in the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool. There will also be at least one in each of Scotland, Wales and Northern Ireland.
Mr Hunt also announced a series of levelling-up and local transport-related funding pots.
Taxes
The chancellor confirmed the planned increase in corporation tax to 25 per cent will be going ahead, but announced a new policy of “full capital expensing” over the next three years, which will mean every pound invested in IT equipment, plant, or machinery can be deducted immediately from profits.
Mr Hunt said he will introduce a new tax credit for small and medium-sized firms that spend 40 per cent of their expenditure on research and development. Tax reliefs for film, TV and video gaming will also be extended, he said.
Up to £20 billion will be allocated for the early development of carbon capture and storage.
Mr Hunt said that, subject to consultation, nuclear power will qualify for the same investment incentives as renewable energy and alongside that “will come more public investment”.
Eoin Treacy's view
Falling Gilt yields could not come at a better times for the UK and its mortgage holders. The upgraded growth estimate which expects to avoid a recession this year helps to highlight the efforts of the Bank of England to talk the market down were more about affecting sentiment than actually containing growth.
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Oil-Options Covering Adds To Market Chaos, Fueling Crude Selloff
This note for Bloomberg may be of interest. Here is a section:
Exposure to plummeting oil prices via the options market has forced some financial firms to dump crude futures, accelerating a selloff that has sent prices plunging to the lowest in over a year.
Banks and other financial institutions typically take on futures positions to offset some of the price hedging they do for oil producers and other customers. But as oil prices collapse rapidly, the firms’ exposure rises, forcing them to exit their futures positions in a strategy known as delta hedging.
That’s driving some of the day’s selloff, UBS Group AG (NYSE:UBS) analyst Giovanni Staunovo said in a note. A massive number of WTI options contracts that were sold at $70 and $75 a barrel needed to be covered once oil futures crashed below those levels, market participants said. For Brent, more than 24,000 put options were open at $80 and $75 a barrel for May, both levels that were breached this week.
“Financial institutions now need to avoid having a price risk on their balance sheets,” Staunovo said in his note. “So, they are selling crude futures to offset the risks, amplifying the rout.”
Eoin Treacy's view
The oil futures curve is still in backwardation but the gap between the 1st and 2nd month continuation charts is quite narrow and beginning to contract again. Generally, the turn in the spread between the 1st and 2nd months coincides with significant reversals in the oil price. Only three weeks ago the move into backwardation was supporting the view prices would resolve on the upside. That’s been negated by the breakdown yesterday.
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Eoin's personal portfolio: stock market short profit taken March 13th 2023
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy