Goldman thinks UK and Euro banks look resilient

FTSE 100 pushes higher as UBS rescue of Credit Suisse calms market nerves

Proactive Investors -

• FTSE 100 pushes higher as jitters settle
• UBS rescues Credit Suisse (SIX:CSGN) in US$3.25bn deal
• Central banks launch new liquidity measures

European markets advance, US futures move higher

The Footsie is now up 25 points at 7,360.53. Further encouragement has come from the US where futures have recouped early falls to move higher.

Dow Jones futures are up 33 points, S&P 500 futures are 6 points to the good while Nasdaq futures are 19 points higher.

All adding to hopes that the UBS takeover of Credit Suisse and moves by central banks to secure liquidity in the financial markets can bring calm to a nervous market.

Banks have rallied from earlier lows. Lloyds is now just 1.3% and NatWest down 0.8%. Leading insurer Aviva PLC has pushed into the green, up 0.3%. In Europe, UBS has halved its losses, now down 5%.

European markets are also in positive territory, the Dax is up 0.6% and the CAC-40 is up 0.8%.

Goldman thinks UK and Euro banks look resilient

Goldman Sachs thinks the Euro area and UK banking systems continue to look resilient on key metrics, and macro measures of contagion have only deteriorated modestly.

The investment bank feels the main drag on economic activity is therefore likely to come from a tightening in bank lending, which is already contracting in response to higher policy rates.

Estimating the response of bank lending to the banking stress, however, is difficult, the bank stated.

Goldman estimated that the recent drop in bank stocks, rise in financials spreads, and increase in uncertainty might tighten bank lending standards by around 10 percentage points both in the Euro area and the UK.

While significant the broker notes this is quite a bit smaller than the deterioration of credit conditions seen during the global financial crisis (50pp) and the Euro area sovereign crisis (20pp).

This tightening points to a real GDP hit of about 0.3% in the Euro area and 0.5% in the UK.

As a result Goldman has lowered estimates for the level of Euro area real GDP by 0.3% over the next year by reducing growth by 0.1pp in each from quarter from quarter three 2023 to, and including quarter one, 2024.

It now predicts 2023 growth at 0.7%, which remains slightly above consensus but below the latest ECB staff projections.

For the UK, Goldman makes a smaller level downgrade of 0.2% and now sees zero growth this year.

Given the additional growth drag from the banking stress, the bank expects the ECB to hike by 25bp in May and another 25bp in June for a terminal rate of 3.5%.

“We maintain our view that the BoE is more likely than not to hike 25bp next week, but we no longer expect the BoE to hike in May and lower our terminal rate to 4.25%. We see substantial uncertainty around our updated central bank paths in both directions.”

Bank of England sees zero bids for dollars in new operation - Reuters

The Bank of England has not received any requests for dollars through the new operation announced by the world’s top central banks last night.

According to Reuters, the BoE said it received no bids for dollar liquidity at a first daily seven-day repo operation that was launched on Monday.

That suggests that UK banks were not desperate to get their hands on US dollars this morning.

In Europe, Eurozone banks borrowed just US$5m from the European Central Bank through the new dollar swap facility set up by the major central banks last night, Reuters reports.

ECB LENDS BANKS $5 MLN IN 7-DAY SWAP OPERATION UNVEILED ON SUNDAY IN COOPERATION WITH THE FED.

— Breaking Market News (@financialjuice) March 20, 2023

Meanwhile the FTSE after pushing into the green has settled 3 points lower.

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