Market Update for 20 March 2023

Last week ended with a volatile market after the failure of the Silicon Valley bank, followed by a emergency cash injection of US$30bil into Signature bank from the top banks in US. Then we had the deal struck by Swiss regulators to have UBS acquire Credit Suisse for US$3bil.

The deal by UBS will render all Coco bonds worthless, which is a AT1 bond where the bondholders will lose all their capital in the event that Credit Suisse's share price goes zero. However, in this deal, Credit Suisse's shareholders were bought out for US$3bil, where the AT1 bonds are being written off, which defies the seniority of the bonds over equities. This poses a major risk for AT1 bond market which is a $257b market size, we might see heavy dumping of AT1 bonds for banks since its safety is not guaranteed and it will cause more risks as AT1 bonds are being sold to shore up its tier 1 capital under Basel requirements

This week, we will be having the FOMC Fed Fund rate announcement which I am expecting FOMC to lower the interest increase to 25 basis points or to pause the rate hike for this round due to the unexpected banking risks. As such, I think it is a good time to be shoring up US Treasuries as we should be expecting the terminal rate to reach this year. If FOMC were to increase interest rates further, it might cause more unrealized losses on the banks' balance sheets which might worsen the liquidity issue in more banks, which might prompt for a higher possibility of a bank run, which might in turn into a full-scale financial crisis.

Crude oil also headed down last week as there is a greater expectation of oversupply for crude oil the first half of the year, and due to the worries that the global demand will weaken due to the potential financial crisis.

The Asia market is also being affected by bank issues worldwide and headed to its 19000 level on Monday.

I would recommend for this period, start accumulating on US treasuries and continue to long on Asia Equities (however it might be affected by US financial crisis if it happens), and avoid US equities.