Bob Michele, the chief investment officer of fixed income at JP Morgan Asset Management, said he’s hopeful that UBS Group AG’s deal to buy its troubled Swiss rival Credit Suisse will be enough to stave off a wider selloff in European banks this week.
“I think the regulators in Europe, and Switzerland, and I think those in the US, when you circle back a week ago, responded with a speed we’ve never seen before and cut a lot of red tape and stopped this in its tracks,” Michele told Bloomberg Television on Sunday.
UBS will pay 3 billion francs ($3.3 billion) for its rival in an all-share deal that includes extensive government guarantees and liquidity provisions from the Swiss National Bank. The price per share marked a 99% decline from Credit Suisse’s peak in 2007.
Michele said he gives UBS “a break” for wanting the guarantees and provisions, saying the bank only had “a couple days to do due diligence.”
The deal seeks to address client outflows and a massive rout in Credit Suisse’s stock and bonds over the past week following the collapse of smaller US lenders, including Silicon Valley Bank.
While Michele said he has been surprised by the developments of the past two weeks, “we just have to accept the banking system is a fractional reserve system,” in which banks are required to hold only a portion of the money deposited with them as reserves.
He said the effects of quantitative tightening by the Federal Reserve are now starting to bite, adding he is now “more confident that we are headed to recession.”
“This is still the start of this taking hold. For sure it’s going to slow growth. For sure it’s going to take down inflationary pressures,” he said. “The Fed doesn’t have to raise rates on Wednesday. The market’s going to do the credit tightening for them.”
Michele said he expects the Fed to cut rates in September and he also repeated a previous assessment that the whole Treasury yield curve will come down to as low as 3% during the summer.
Michele’s view before the banking trouble surfaced was that the Fed would raise interest rates in February and March before pausing to assess the impact of its fastest monetary tightening since 1981.
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