El-Erian, Yardeni & Gundlach on Bank Turmoil, Market Impact

The early calm in Asian markets on Monday quickly gave way to fresh jitters about the outlook for the global financial system, and investors and strategists are bracing for further tumult.

Stocks, bonds and currencies were mostly mixed at the open after UBS Group AG on the weekend agreed to take over Credit Suisse Group AG, and central banks announced extra dollar liquidity. The optimism didn’t last long.

A record drop in Asian banks’ Additional Tier 1 bonds and a tumble in HSBC Holdings Plc shares on concern of its exposure to Credit Suisse saw Treasury two-year notes erase losses and European stock futures swing to a decline.

JPMorgan Asset Management’s Bob Michele said it’s still too early to tell how things will end but the Federal Reserve will probably have to cut interest rates later this year. Ed Yardeni at Yardeni Research Inc. said the banking turmoil may cause a recession if it sets off a credit crunch.

Here are some comments from market players about the latest financial developments:

Bob Michele, chief investment officer at JPMorgan Asset Management in New York: “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. The Fed doesn’t have to raise rates on Wednesday. The market’s going to do the credit tightening for them.”

“We’re expecting the Fed to cut rates in September to stave off recession.” The UBS deal to acquire Credit Suisse should take some pressure off European bank stocks, he said.

Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist: “It was a bailout,” he said of the UBS acquisition of Credit Suisse. “This was not the best solution, but it dominated the other two, which was either nationalization, or trying to wind down the bank.”

“It’s not clean, but of the available options, this was the best one that they could have had.”

Jeffrey Gundlach, chief executive and chief investment officer at DoubleLine Capital LP: “Bloomberg reports the gunslingers who foolishly kept holding Credit Suisse’s bail-in bonds are angry they are being wiped out. Seriously? Put on your big boy pants and look in the mirror. That’s where the ‘blame’ lies. Learn how to manage risk!” he wrote in a tweet.

“Members of my investment team met with a very significant asset allocator last Wednesday, who reported that ALL of their ‘distressed debt’ managers opined that Credit Suisse’s bonds were ‘money good,’ meaning would return par. Only off by 100 points. To quote Rick Perry: ‘Oops’”

Ed Yardeni, president of Yardeni Research in New York: “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.”