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Morning Update

Credit Suisse Results Show Bank Suffered $69bn in Outflows over Q1

Credit Suisse have revealed that they experienced SFr61.2bn of client outflows in Q1, demonstrating the scale of the bank run which brought investors and policy makers around the world to the edge of their seats. This included Credit Suisse’s wealth management unit loosing 9% of its assets over the quarter meaning that the division had 29% less than the same period in 2022. The 167-year old bank added that “These outflows have moderated but have not yet reversed as of April 24, 2023” and these figures underline the scale of the challenge that UBS now has in shoring up their former rival. Indeed, one analyst told the BBC’s Today programme “If anything today we’ve got confirmation of what UBS has bought.”

Credit Suisse’s latest report also notes that the bank had an adjusted pre-tax loss of SFr1.3bn for Q1 and a net income of SFr12.4bn over the period. Its important to note however that this net income figure was helped by the controversial writing off of $17bn of Credit Suisse’s Additional Tier 1 (AT1) bonds. These AT1 bonds are a fixed income instrument which were created in the wake of the 2008 crash to try to ensure that in the event that a bank went into distress, losses were absorbed by the principals of some bond holders to try to mitigate against the need for bail outs. While AT1s are subordinated to other forms of debt, they rank higher than preferred equity and common equity. Hence, when it was announced that $17bn of Credit Suisse’s AT1 bonds were written off while at the same time shareholders were set to receive CHF3 billion in an all-share merger, investors worried over an unsettling of the conventional hierarchy of lenders protection. Given that the global market for AT1 bonds stands at around $275bn, this unsettling led to a risk off move as markets weighed on whether the Swiss authorities had created a potentially dangerous precedent in the AT1 market, and bond market more generally.

All eyes are now on UBS’s first quarter results which are released tomorrow morning.

Markets Await US GDP

On Thursday, all eyes will be on US GDP for Q1 where the general market consensus is predicting a print of 2%. While the first half of Q1 2023 was characterised by recessionary concerns easing and upbeat investor sentiment, the latter half was underpinned by instability across the global banking sector. Data from the US also indicated that retail sales fell 0.2% in February and 1% in March, and while some figures have also suggested a slowing down in their labour market, it remains relatively strong.

Thursday’s data follows March’s final estimate of US growth over Q4 2022 which indicated that the US economy grew 2.9% on an annualised. This beat expectations of 2.6% and helped markets build confidence in the notion of the US economy having a ‘soft-landing’. Here, the re-filling of inventories helped push up business demand, though fixed investment reduced 6.7% as businesses grappled with economic uncertainty and rising costs. On a longer-term view, at the back end of 2022, the OECD estimated that real GDP is projected to grow by 1.8% in 2022, 0.5% in 2023 and 1.0% in 2024, though many organisations have upwardly revised these figures in recent months with consumer and business sentiment picking up.

This morning’s open has seen oil prices continue to retreat, extending losses which saw WTI crude futures slump close to 6% last week. This price action follows investors weighing on the prospect of further monetary tightening from central banks (including the Fed, BoE and ECB), oil prices have come under pressure, slipping to around $76.6dpb. For example, markets are now forecasting a 25bps from the Fed and are split between whether the ECB will opt for a 25bps or 50bps hike. Last week’s deprecation marks a decline from recent highs seen on 12th April where WTI crude futures edged towards $84dpb as investors considered the impact of PEC+’s announcement that they would look to reduce output by some 1.16 million barrels per day from May until the end of 2023.

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