European risk assets sold off today as worries surrounding the financial health of Credit Suisse led to a rout in bank stocks and bonds, which helped push the iTraxx Crossover above 500 for the first time this year.
Credit Suisse came under pressure today after a major shareholder appeared to rule out further support. In an interview on Bloomberg TV, Ammar Alkhudairy, Chair of Saudi National Bank, said the bank would “absolutely not” provide capital to Credit Suisse, adding that increasing its 10% stake would bring additional regulatory requirements. The Financial Times further reported comments from Alkhudairy that indicated he was happy with the bank’s restructuring plan, and that it would not need further capital.
But the interview generated a sense of nervousness among European investors, with the bank's shares down by as much as 30% at one stage in the session, though they did find some support later in the day. In an already tough week for risk assets, equity bourses moved sharply lower as banks came under pressure, taking the Euro Stoxx 50 down 3.5% on the day.
For leveraged markets, the pressure was most acutely felt in CDS, with the iTraxx Crossover widening more than 40 bps on the day, amid price action that would usually signal expectations of a double-digit default rate.
The surging risk premium of insuring against defaults also adds to growing uncertainty over whether the ECB will push ahead with a 50 bps hike to its policy rate tomorrow, which economists had been widely predicting ahead of the plunge in bank stocks and bonds, which has seen deeply subordinated Credit Suisse AT1 bonds offered 25 points lower on the day.
Former ECB official Vitor Constancio said today that the central bank should “tone down their hiking campaign” amid the rout in bank shares, arguing that it should either delay the planned interest rate rise or push through with a smaller 25 bps hike at tomorrow’s meeting of the governing council.
Indeed, Credit Suisse debt has been at the forefront of selling across AT1 and bank hybrids, although traders say the wider market for risk assets has turned illiquid. “The bid-offer spread has widened as people try to assess the impact of all of this,” said a manager.
In contrast, uncertainty over the path of monetary policy has seen rates tighten in what traders describe as an extraordinarily volatile week for government bonds. At the time of writing, the yield on the 10-year bund had tightened roughly 27 bps on the day to 2.18%, according to Refinitiv prices.
Price action at the more policy-sensitive front end of the curve has been starker still, with two-year bund yields down a massive 40 bps on the day to 2.47% as traders bet on a smaller hike at tomorrow’s ECB meeting.