London’s leading index was facing the pressures of international banking concerns on Monday after UBS took over Credit Suisse.
However, early losses for the index were reversed and the FTSE 100 was trading 0.4% at the time of writing.
Far from an orderly takeover of Credit Suisse, the deal was rushed through and has eroded confidence in the European banking system.
UK banks Barclays, Lloyds, NatWest, HSBC and Standard Chartered were down on the day, but were trading well off the lows.
Despite the swoop on the Swiss lender preventing a complete collapse, the terms of the deal were unfavourable for Credit Suisse share and bond holders.
UBS paid a little over $3 billion for Credit Suisse in a government-brokered deal. This was a massive discount to Friday’s closing price.
Banking confidence
The willingness of a European government to oversee and impose significant losses on bank investors rocked European banking shares with Deutsche Bank and BNP Paribas among the losers.
While shareholders suffered dearly as a result of the takeover, holders of AT1 bond were completely wiped out.
Credit Suisse’s $17bn worth of AT1 bonds were effectively marked to zero as part of the deal. These are high yielding, high risk assets.
AT1 bonds are designed to prevent the collapse of a bank by converting into equity in certain circumstances. They were employed as a result of the financial crisis and the losses incurred by investors in these assets have raised questions about these types of bonds at other banks.
“The Swiss financial regulator has ordered that Credit Suisse’s AT1 bonds be written down to zero. That appears to have spooked investors and has led to a sell-off in other bank debt and that’s weighed on share prices,” said Russ Mould, investment director at AJ Bell.
“It means the banking crisis we’ve seen over the past few weeks has started a new chapter rather than reaching its ending.”
“Spare a thought to investors holding exchange-traded fund Invesco AT1 Capital Bond ETF, whose share price slumped nearly 16%. It tracks the performance of an index of AT1 bonds including some issued by Credit Agricole, Barclays, Lloyds and UBS.”
Precious metals
The safe haven of Gold has been a major beneficiary of the chaos in the US and European banking system and again rallied on Monday. Gold was trading up $46 to $1977 at the time of writing.
Gold’s strength supported the FTSE 100’s precious metals focused miners Endeavour Mining and Fresnillo on Monday. The two miners were the FTSE 100 top risers on Monday, both up over 3%.
Diversified miners were also higher and were the driving force in taking the FTSE 100 into positive territory.