The best time to talk to a
Merrill Advisor? Yesterday.The best time to talk
to a Merrill Advisor?
Yesterday.

Chris Hyzy:                This is Chris Hyzy, Chief Investment Officer, for the market update for the first day of the spring, March 20th. To start, here's the quick latest on the banking events. UBS buys Credit Suisse for $3.2 billion with liquidity and loss protection from the Swiss Government and Swiss national banks over the weekend. [Asset] sales have begun at two of the small banks that we’ve all been reading about that has failed previously also over the weekend. Importantly, to make extra liquidity available in the global markets, the large central banks around the world are increasing dollar swaps - in other words, dollar funding - to daily operations from weekly operations in order to create further stability. Equity prices across the banks particularly in Europe and the United States are somewhat stable this morning to slightly up, but areas and overall stress still remain high. Debt crisis in European banks are settling at levels above their lows over the weekend as investors parse through the Credit Suisse sale. A lot of questions remain regarding the payouts or lack thereof in some specific securities in the capital structure of European banks. In the meantime, spreads remain near their widest levels for both a sample of US regional banks and Credit Suisse US dollar holding company bonds. This is on the back of the S&P downgrade to a regional bank in the United States over the weekend to double notches below and now at a high yield status well again over the weekend. Simply put, markets remain on high alert. Now switching to the second order effects. What's next for growth, inflation, and markets? From our perspective, what are the collateral effects that are also important for US regional banking areas that we've already witnessed? If regional banking issues are a ring fence with tightening of lending standards and a slowdown in credit creation overall would be consistent with our B of A Global Economics team baseline outlook for a mild recession in the US economy at the end of this year. Our B of A Bank Research team believes the Fed will impose stricter liquidity and capital requirements on a larger subset of banks leading to the tightening lending standards which ultimately leads to, in our opinion, a somewhat deflationary type of backdrop in the short to medium term. Therefore, more pronounced financial stress could also lead to Fed cuts and even a return to the zero lower bound if financial stress spread but this is not our base case at this time. We continue to monitor credit spread, funding spreads, and debt prices of financial firms in order to assess the level of overall trust in the system as events continue to unfold. In terms of the equity markets, we continue to expect markets to remain stuck in a grinded out pattern while [new flow] remains cloudy on both the financial and economic front. We emphasize high levels of diversification, exposure to higher quality areas overall. While the situation remains uncertain, we expect financial stress to stabilize in the coming few weeks then the question should switch towards the economic impact and the eventual economic landing. We expect three episodes of market weakness with small rallies in between. Longer term investors looking to dollar cost average high cash positions and are significantly underweight equities at this time should have better opportunities in the late spring/early summer and again in the fall in our opinion. For now, we let the volatility subside. That'll do it for today. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.       

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