Banking stocks were leading another severe market decline early Monday, as last week’s turmoil continued into the new week, despite a takeover agreed for troubled Swiss lender Credit Suisse.
The FTSE 100 index opened down 115.03 points, 1.6%, at 7,220.37. The FTSE 250 was down 405.08 points, or 2.2%, at 18,065.75, and the AIM All-Share was down 9.52 points, or 1.2%, at 794.51.
The Cboe UK 100 was down 1.5% at 722.97, the Cboe UK 250 was down 2.1% at 15,697.40, and the Cboe Small Companies was down 1.6% at 12,644.51.
UBS will take over its Swiss rival Credit Suisse for $3.25 billion following crunch talks on Sunday aimed at stopping the stricken bank from triggering a wider international banking crisis.
The Swiss government said the deal, involving Switzerland’s biggest bank taking over the second-largest, was vital to prevent irreparable economic turmoil spreading throughout the country and beyond.
Shares in UBS were 15% lower in Zurich on Monday morning. The bank has a market capitalisation of fr.53.17 billion. Shares in Credit Suisse plunged 63% for a market cap of just fr.2.78 billion, about $2.99 billion.
The acquisition was welcomed in Washington, Brussels and London as one that would support financial stability.
‘This deal could draw a permanent line under the Swiss banking sector’s problems. Credit Suisse has been absorbed into a healthier bank with much deeper pockets. This should provide time for the UBS management to reform Credit Suisse and shrink its troubled investment bank,’ commented Andrew Kenningham, chief Europe economist at Capital Economics.
‘However, the track record of shotgun marriages in the banking sector is mixed. Some, such as the 1995 purchase of Barings by ING, have proved long lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank while others have proven very difficult to implement.’
The pound was quoted at $1.2170 at early on Monday in London, virtually unchanged compared to $1.2168 at the London equities close on Friday.
The Bank of England has insisted the financial system in the UK remains ‘safe and sound’, in an effort to calm fears after the emergency sale.
In European equities on Monday, the CAC 40 in Paris was down 0.8%, while the DAX 40 in Frankfurt was down 1.0%.
France’s central bank chief sought to distance European and French banks from the problems at Credit Suisse and banking woes in the US.
Credit Suisse and the banking volatility in the US ‘don’t concern French and European banks’, Francois Villeroy de Galhau, a member of the European Central Bank’s governing council, told France Inter radio.
The euro stood at $1.0636, lower from $1.0665 late Friday. Against the yen, the dollar was trading at JP¥130.69, down from JP¥132.12.
Francesco Pesole at ING said he expects the yen to stay in demand for now amid the current risk-off market backdrop.
The US Federal Reserve and other major central banks are making a coordinated effort to improve banks’ access to liquidity. The special drive will be launched on Monday by the Fed and the central banks of Canada, the UK, Japan, the EU and Switzerland.
The move comes after the US banking regulator struck a deal to sell most of the assets of the failed Signature Bank to another institution on Sunday.
Signature Bank was seized by the Federal Deposit Insurance Corp a week ago after it imploded in the wake of the collapse of Silicon Valley Bank earlier in March. The FDIC is seeking a similar deal to sell off parts of SVB, according to Bloomberg.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: ‘The next few hours of trading will give us a better picture on whether the crisis is contained.’
In London, banking stocks were the worst performers in early morning trade. Barclays was down 7.4%, Standard Chartered down 8.0%, NatWest down 7.8%, and Lloyds down 4.6%. HSBC, which last week bought the UK arm of SVB, was 5.1% lower.
Conversely, mining stocks were some of Monday’s top performers, with Fresnillo up 3.3% and Endeavour Mining up 6.2%.
Separately, the UK water services regulation authority Ofwat on Monday announced new powers that will enable it to stop the payment of dividends by water utilities if they would ‘risk the company’s financial resilience’. It said it would also take enforcement action against water companies that don’t link dividend payments to performance.
Ofwat said the change will require company board to ‘take account of their performance’ for customers and the environment when deciding to make dividend payments and will require companies to ‘maintain a higher level of overall financial health’.
Water utilities were higher in early morning trade, with investors perhaps fearing worse from the regulator amid growing political pressure following the repeated release of sewage into UK rivers. United Utilities was up 1.2%, Severn Trent up 1.3%, and Pennon up 0.3%.
Elsewhere in the FTSE 100, Intertek was down 0.4%. The product testing, inspecting and certification firm announced the promotion of Colm Deasy to chief financial officer.
Deasy replaces Jonathan Timmis who has stepped down with immediate effect, with no reason provided by the company for his departure.
In the FTSE 250, FirstGroup fell 1.4% despite announcing it extended the current arrangements for its West Coast partnership rail contract with the UK Department for Transport.
The arrangements were set to expire on March 31 and have now been extended to October 15, ‘broadly’ under the same terms and conditions, the public transport provider said.
The contract comprises of the operation of Avanti West Coast and the shadow operation of the HS2 programme.
On AIM, Genedrive jumped 8.1% after it announced that its MT-RNR1 ID kit is in process for roll out at two further hospital sites in the Greater Manchester.
Genedrive’s MT-RNR1 ID kit is a commercial point-of-care genetic test that helps to avoid irreversible lifelong hearing loss in specific infants exposed to aminoglycosides antibiotics by detecting a gene variant that can cause deafness, allowing for alternative antibiotics to be prescribed.
In Asia on Monday, the Japanese Nikkei 225 index closed down 1.4%. In China, the Shanghai Composite closed down 0.5%, while the Hang Seng index in Hong Kong finished down 2.7%. The S&P/ASX 200 in Sydney lost 1.4%.
China’s central bank left its interest rates unchanged. The People’s Bank of China said it held its one-year loan prime rate - which serves as a benchmark for corporate loans - at 3.65%. The five-year rate also remained at 4.3%.
It was the seventh successive month that the PBoC left rates unchanged. The move had been anticipated by the market, according to FXStreet-cited consensus.
In the US on Friday, Wall Street ended lower, with the Dow Jones Industrial Average down 1.2%, the S&P 500 down 1.1% and the Nasdaq Composite down 0.7%.
Brent oil was quoted at $70.26 a barrel early in London on Monday, down from $73.43 late Friday. Gold was quoted at $2,004.05 an ounce, sharply higher against $1,957.76.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said the yellow metal remains in demand because investors believe that banks are not out of the woods yet.
‘Traders always prefer safe haven in a situation like this as the contagion risk is always very high,’ Aslam said.
Still to come in Monday’s economic calendar, there is a US retail trade report at 1400 GMT.
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