As we head towards the end of a tumultuous week for global equities, the FTSE 100 resumed the move to the downside despite volatility subsiding in early trade across Europe.
The FTSE 100 was down round 0.5% at the time of writing on Friday after giving up early gains.
European stocks opened higher after US banks moved to stabilise regional US bank First Republic overnight. The move follows efforts by the Swiss central bank to support Credit Suisse with access to $54 billion.
“Whether the efforts on the part of the Swiss government to prop up the bank prove sufficient, whether Wall Street’s injection into troubled regional institution First Republic overnight works, and whether there are any other vulnerable banks are likely to remain key considerations for investors. The dreaded c-word, contagion, certainly remains in the air,” said AJ Bell investment director Russ Mould.
Although the shares of both First Republic and Credit Suisse were again trading negatively on Friday, the declines were more moderate than the swings we saw earlier in the week. Credit Suisse was down 11% at the time of writing.
Around midday on Friday, SVB announced they were filing for bankruptcy in the US and sparked a fresh wave of selling.
The FTSE 100’s banks were down marginally. Barclays and Lloyds were both down around 0.5%. Standard Chartered was off 0.8%.
Investors will be looking forward to the weekend after a week of uncertainty and volatility, but will have to be prepared for another potentially choppy week next week as the Federal Reserve meets to set the next change in interest rates.
US rates
The collapse of SVB and fears about Credit Suisse overshadowed the interest rates concerns this week, but make no mistake, whether the Federal Reserve hikes 25bps or 50bps, and their comments on the trajectory of rates, promises dramatic moves in equities and the bond market next week.
Indeed, the troubles in US regional banks and Credit Suisse are a result of the tightening cycle.
“The pace and scale of the rate tightening cycle after a decade of virtually zero interest rates was always likely to reveal stresses and strains in the financial system but if central banks row back, they risk leaving inflation even more entrenched and fostering a sense of panic,” said Russ Mould.
The Federal Reserve are stuck between a rock and a hard place.
They need to bring high inflation rates under control, but risk further instability with further rate hikes. A 50bps hike is warranted given US CPI is still at 6%.
However, there is an argument the disruption in the banking system this week may act to tighten financial conditions and do the Fed’s job for them.
A 25bps hike may suggest the Fed is concerned about financial stability and unleash a fresh wave of concern.
Today’s more benign trade in equities could well be the quiet before a new storm.
The FTSE 100’s more defensive nature may see the index provide a refuge and lead to outperformance compared to US indices, should we experience Fed-induced volatility.