Investors Say Banking Crisis Far From Over Even After UBS’s Credit Suisse Deal

(Bloomberg) — Investors and strategists say the turmoil in global financial markets still has room to run even after UBS Group AG’s agreement to take over of Credit Suisse Group AG, and the announcement of new dollar liquidity measures among central banks.

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The key event this week will be the Federal Reserve’s policy decision Wednesday, with markets waiting to see if the recent tumult in global markets will convince US policymakers to hold back from raising interest rates.

Here’s what some some in the market had to say as trade resumes in Asia on Monday:

Ed Yardeni, president of Yardeni Research Inc.:

“The current banking crisis isn’t likely to be as wrenching as the GFC. However, it could cause a recession if it triggers an economy-wide credit crunch. Whether it will is the question we’re grappling with currently,” he wrote in a research note.

“We aren’t raising our recession odds just yet, but we may have to do so if we see signs that the Fed’s efforts to stabilize the current banking crisis aren’t working.”

Win Thin, global head of currency strategy at Brown Brothers Harriman & Co:

“The Credit Suisse deal coupled with the swap line news have calmed nerves, for now. But I think First Republic and other regional banks remain unsettled and so I’m not sure we can sound the all clears just yet.”

Gregory Peters, co-chief investment officer PGIM Fixed Income:

A Fed “pause is probably the appropriate response. Raising rates acts tone-deaf and cutting rates acts too suspicious,” he said in an interview with Bloomberg Television. “Central bankers globally are really focused on contagion risk and making the system function. Whether that translates into a different rates policy, that is the question on the table.”

“Everyone is expecting that this shakeup will bring the economy down and inflation with it but if that doesn’t occur, then that is a whole different outlook and that changes the entire trajectory of the Fed curve.”

Gerard Macdonell, senior managing director at 22V Research LLC in New York:

“For the Fed to hold off on Wednesday might send a signal of panic. It might also lead to a further intensification of inflation pressures and more bond market volatility down the road.”

“The idea of the Fed pausing even as they recognize they later have to go further does not seem convincing.”

“It is not at all clear that avoiding a rate hike would even help address the financial troubles in the banking system.”

Strategists including Derek Tang at LHMeyer/Monetary Policy Analytics:

“The higher risk of pausing also suggests higher risk that the FOMC would revise downward or suspend balance sheet runoff, especially if policymakers think recent stress sends a definitive signal of reserve scarcity at the aggregate, systemic level rather than only at the level of individual banks.”

Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney:

“Asia Pacific has been watching these issues unfold in Europe and the US, so it will be hard to derive any major market conclusions from the price action during our day.”

“Key will be how financial markets react to the news tonight, particular how the CoCo market reacts to the news Credit Suisse CoCos have been completely wiped out,” he said, referring to the bank’s contingent convertible debt that was written down over the weekend.

Analysts including Sharon Zollner and David Croy at Australia & New Zealand Banking Group Ltd:

“Central banks are trying to separate monetary policy and financial stability concerns, but that’s easier in theory than in practice.”

Past excessive stimulatory policy is “coming home to roost in more ways than just inflation outcomes” and there’s a risk financial conditions may tighten so much it causes “a sharply disinflationary hard landing,” they said.

–With assistance from Matthew Burgess and Ruth Carson.