Since our last communication last Thursday, the situation in the international financial system has developed in a very agitated way. The uncertainties in the American region due to the bankruptcies of the two commercial banks "Silicon Valley Bank" and "Signature Bank" have spread to the European continent within a very short time. The main victim of the general uncertainty last week was the major Swiss bank Credit Suisse (CS), which experienced a massive withdrawal of client deposits and was finally taken over by the largest Swiss bank UBS over the weekend under the involvement and pressure of the Swiss government and authorities.

The takeover of CS by UBS has contributed to a significant easing of the international financial system. The stock markets have recovered noticeably and volatility has decreased noticeably. At the same time, interest rates on the capital market have fallen due to the flight of investors into safe asset classes. UBS itself seems to have coped well with the takeover of CS. After a brief dip, the share has risen by around 5% in the course of the week so far.

Central banks raise interest rates - focus remains on fighting inflation

Central banks were particularly challenged by the recent turmoil in the financial system.
In shaping monetary policy, the conflict of goals between fighting inflation and maintaining financial stability intensified. However, the marked decline in long-term capital market interest rates in recent days has significantly weakened the valuation pressure on fixed-income securities that was at the origin of the collapse of Silicon Valley Bank and thus the banking crisis. This has brought the fight against inflation back into focus.

Against this backdrop, the US Federal Reserve raised its key interest rate by 0.25 percentage points to 5 per cent, the European Central Bank by 0.5 percentage points to 3.5 per cent and the Swiss National Bank by 0.5 percentage points to 1.5 per cent. It can also be observed that the American banks in particular have become much more cautious in granting loans to companies and private households. This tightening of credit is also having an effect comparable to an increase in the key interest rate.

Defensive positioning still makes sense

Thus, the signs of an impending mild recession are increasing. For the time being, this is not good news for investors, since the bottom of the market development has probably not yet been reached. From the perspective of financial stability, however, this is a good development. The current constellation, in which capital market interest rates are below inflation, leads to distortions on the financial markets and endangers financial stability in the long run. A recession can solve this imbalance. If it occurs, inflation is likely to cool and interest rate dynamics will weaken, which in turn could positively influence the leading stock markets in the second half of the year. Against this background, we recommend that our clients stick to their defensive positioning for the time being.