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March madness: FTSE and DAX capitulate on CSFB concerns

Crushing the flickers of optimism that followed yesterday's improvement in risk sentiment, the cyclonic conditions that hit the US last week slammed full force into Europe overnight.

Source: Bloomberg

Crushing the flickers of optimism that followed yesterday's improvement in risk sentiment, the cyclonic conditions that hit the US mainland last week slammed full force into Europe overnight.

The share price of troubled Swiss Bank Credit Suisse tumbled 32% to its lowest price ever of CHF 1.70 per share on confirmation that the bank's largest shareholder, the Saudi National Bank, would not add to their stake in the stock.

French Bank, BNP Paribas said it would no longer accept so-called novations where BNP is asked to step in on derivatives contracts on which Credit Suisse is a counterparty.

Ironically, I worked at BNP Paribas in Australia over a decade ago when a similar thing occurred there during the European Sovereign crisis.

The Swiss central bank, the SNB, has since pledged to provide CSFB with emergency funding if necessary, hoping to restore confidence. However, for a poorly run bank whose share price pre-the GFC traded above CHF 83.00, its fate is uncertain, and a bailout may soon be required.

Caught in the downdraft, the FTSE fell 4.15% to close at 7344, wiping a cool £75bn from the UK benchmark index, while the German Index, the DAX, fell 3.49% to close at 14375.

Now for some good news. The overnight shockwaves mean the ECB will be unable to deliver on its pre-commitment to raise rates tonight by 50bp. It will most likely be 25bp at best, and the ECB's Terminal rate is now viewed at 3.11%, a dramatic repricing after being at 4% early last week.

More broadly, the woes of the global banking sector mean that inflation is yesterday's problem. And to a certain extent, the past week's events have done the dirty work of central banks and will dampen inflation. Higher funding costs, stricter regulation, lower margins, and capital raises will restrict the flow of credit to the economy, and both growth and inflation will inevitably slow.

CSFB share price weekly chart

Source: TradingView

DAX technical analysis

The madness of March has caused the DAX to well and truly crack the band of horizontal support coming from recent lows at 15,160 and the uptrend support from the October lows highlighted in last Thursday's update. There is also evidence of a completed five-wave advance (Elliott Wave) from the October 11,829 low.

"Aware that should the DAX see a sustained break below support at 15,160, it would likely see a deeper decline towards 14,000."

Although a bounce tonight is likely following the SNB's supportive comments, the break of 15,160 indicates a medium-term high at last week's 15720 high. As such, the expectation is that bounces will be sold towards 15,100 and that a deeper decline towards 14,000 will unfold in the weeks ahead.

DAX daily chart

Source: TradingView

FTSE technical analysis

In last week's update, we noted that the pullback from the 8047 high looked incomplete and that "if the FTSE were to see a sustained break of support 7700/7650, it would warn that a medium-term high is in place at 8047 and that a deeper decline is underway."

Monday's break of support at 7700/7650 indicates that a medium-term high is in place at the 8047 high. As such, the expectation is that bounces will be sold towards 7700 and that a deeper decline towards 7100 will unfold in the weeks ahead.

FTSE daily chart

Source: TradingView

TradingView: the figures stated are as of March 16th, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

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