Markets drop after Credit Suisse-UBS slide, investors move to gold, bonds

Indian markets dropped over 1.6 per cent amid a sharp slide in shares of Credit Suisse and UBS, which stoked fresh contagion fears from the banking crisis in the western world. Investors dumped risky assets and commodities to move to safer assets like bonds and gold. UBS Group’s agreement to buy Credit Suisse Group did little to assuage fears about potential global banking turmoil first triggered by the collapse of US-based Silicon Valley Bank.

The benchmark Sensex declined as much as 905 points but recouped two-third of the losses to finish 361 points, or 0.62 per cent, lower at 57,629. The Nifty—after briefly slipping into correction territory—recovered 160 points from the day’s low to close at 16,988, down 112 points, or 0.65 per cent over its previous close.

The sharp bounce from the day’s low was aided by the recovery in the European markets. The European markets opened lower but later traded even as shares of Credit Suisse and UBS continued to pressure. Shares of Credit Suisse fell nearly 60 per cent, while UBS had declined close to 10 per cent.

Foreign portfolio investors (FPIs) continued to dump domestic equities. They sold shares worth Rs 2,546 crore, while their domestic counterparts provided buying support to the tune of Rs 2,876 crore.

"Everyone is thinking about who is next. It has moved from the US to Europe to now Asia. And there are questions about Credit Suisse like what happens to the firm, and how many people will be left? Everyone is looking over their shoulders. And that will keep markets jittery," said Andrew Holland, CEO of Avendus Capital Alternate Strategies.

Over the weekend the UBS group agreed to buy Credit Suisse in a government-brokered deal. As per the deal, the Swiss National Bank is offering 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion franc guarantee for potential losses.

Central banks and financial policymakers in the western world are taking steps to boost the confidence of investors amid fears of contagion risks. An alliance of the Federal Reserve and five other central banks announced coordinated efforts to boost liquidity in the global financial system.

Investors are trying to gauge how the banking crisis will influence the Fed's rate hike decisions. A section of the markets is pricing for Fed rate cuts. Some experts see the current banking crisis as a painful start to the end of the bear market in the US. Investors will be tracking the March 21-22 meeting of the Fed and no longer expect the Fed to hike rates by 50 basis points.

Investors flocked to safer assets the price of international gold rose to $2,000 an ounce intraday after a year. Meanwhile, Brent Crude prices tumbled to their lowest in nearly 15 months.

Apart from the Fed's policy announcement investors will be tracking ECB President Christine Lagarde's statement before the European Parliament’s economic committee and US Treasury Secretary Janet Yellen's Senate subcommittee hearing on Wednesday. The Bank of England and Swiss National Banks will announce their rate decisions this week.

Some see a silver lining in the banking crisis.

“With the Fed injecting liquidity and adopting a more dovish monetary policy stance, it is probable that the Reserve Bank of India will adopt a similar strategy. Therefore, the outlook for the country's interest rate environment is more optimistic than previously. The failure of two U.S. banks has no material effect on the earnings outlook of Indian publicly traded companies. Besides, the anticipated decline in interest rates, including bond yields, would reduce the discounting rate on future earnings of companies, which would have a positive effect on the valuation of Indian equities,” said a note by Anand Rathi Research.

However, it is difficult for the markets to escape near-term volatility. The India Vix index shot up 8 per cent to close at 16. The broader markets were weak with 2,571 declines and 1,072 advances. Reliance Industries nearly a per cent and contributed the most to Sensex declines. The stock of the country’s most valuable firm is down 14 per cent year-to-date. Infosys fell 1.2 per cent and HDFC Bank fell 0.73 per cent. FMCG majors Hindustan Unilever rose 2.5 per cent and ITC gained nearly one per cent.