Despite the likelihood of the Fed not raising rates increasing to 65%, the market is down and Credit Suisse is down 20%. There are concerns over the ability for Credit Suisse to stick around following a bank run due to liquidity issues, and there are issues with the bank’s internal control over financial reporting. This has caused fear in the market and led to a decrease in GDP outlook, with Goldman Sachs cutting its GDP outlook due to stress on the banking system. This stress means deflation may occur, causing liquidity to dry up and impacting lending. Crypto and stock prices are also declining, with investors advised to hold cash.
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The Market is Breaking: What’s Happening and Why?
The current state of the market is causing confusion and concern for many investors. Despite a 65% chance of zero rate hikes next week by the Federal Reserve, the NASDAQ and S&P 500 are down 1.5%, and crypto is down, specifically Bitcoin, which has lost 5% over the past 24 hours. So what’s causing this downward shift? It all comes down to Credit Suisse.
Credit Suisse’s Troubles
Credit Suisse, the second-largest bank in Europe, is experiencing outflows and liquidity issues, as well as high Credit Default Swap rates, which are exploding to levels not seen since the Lehman crisis. Saudi Arabia’s National Bank, the major investor in Credit Suisse, has also announced that it will not invest any additional money into the bank. The bank has a remediation plan to address its issues, but its financial reporting weaknesses, lack of effective internal controls, and dividend cancellations have eroded investor confidence.
The Banking Industry and the Broader Market Fallout
Credit Suisse’s struggles have created uncertainty not only for European banks but for the entire banking industry, causing fallout throughout various markets. The possible decrease in smaller banks’ ability to issue loans and credit, which will be deflationary and detrimental to growth, has led to Goldman Sachs lowering its GDP outlook. They predict a Q4 over Q4 GDP growth of 0.3% to 1.2%. This situation has also affected the Federal Reserve, reducing the likelihood of rate hikes, but this estimate must be counteracted by a decreasing GDP, resulting in the market still being fearful.
Preparing for the Future
Regardless of whether Credit Suisse can get through this situation, the current state of the market calls for investors to be cautious and prepared. Holding some cash will benefit investors as liquidity dries up and lending decreases, making those with cash king. In conclusion, Credit Suisse’s issues have created turmoil and uncertainty, affecting various markets and leading to a decrease in GDP growth expectations. Investors must act cautiously, hold cash, and stay informed to ensure they are protected in this uncertain market.
