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How are markets viewing contagion risks?

  • In the Asian session the overarching view of the UBS takeover of Credit Suisse was viewed as a positive with Treasuries moving lower as the risk of further bank failures seemed to be lower - and this was where the markets focus was.
  • However, the focus has changed in early European trading. Markets are now focused on the near wipeout of CS' AT1 bonds - and AT1 bonds are getting hit across the board. The big discount to the CS takeover relative to Friday's close has also spooked bank equity holders.
  • So it appears as though the market is now viewing the probability of contagion bringing further bank failures as lower, but the costs to AT1 bond holders and equity holders in the event of a bailout being greater than previously perceived.
  • This change in view led to a reversal in macro markets with Treasuries and Bunds seeing a sharp rally in early European trading.
  • Assuming there are no more financial failures in the meantime, the focus will be on how the Fed communicates on Wednesday (and what policy action it takes).

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