Market Pulse - The week in review
Duncan Presant - Mar 22, 2023
As discussed last week, the aftermath of the collapse of Silicon Valley has been the center of attention for markets.
THIS WEEK’S RECAP:
▪ As discussed last week, the aftermath of the collapse of Silicon Valley has been the center of attention for markets. Silicon Valley bank was not successful in selling itself as a whole, which implies that both its equity and a substantial portion of their issued debt is now worthless. The Government also seized Signature Bank, another regional lender, this one based in New York.
▪ In an important step, the US Government, through the FDIC, the US Treasury and the Federal Reserve, has guaranteed all deposits, whether or not they were above the FDIC insurance cap. A facility for banks to be able to borrow the nominal value of instruments they hold was also created (normally borrowing is only possible against the market value of instruments). Despite these important support measures, uncertainty still remained high in markets and we saw very significant swings throughout the week.
▪ With the fate of Silicon Valley and Signature banks sealed, the market’s attention turned to other regional banks, which came under significant pressure. On Thursday, several major US financial institutions provided support to First Republic Bank by shoring up its deposits. Even though the institution looks well capitalized, it is not clear at this stage if that will be enough and if additional measures will be required.
▪ The banking turmoil also spread overseas, with Credit Suisse coming under pressure which required the Swiss National Bank to provide significant liquidity support. Credit Suisse’s problems are not new, and the bank is undergoing a very significant transformation to address them, but volatile conditions and a focus on financial institutions have created important pressures. Here again, despite the significant support offered, we should expect things to remain volatile.
▪ All of this market action overshadowed important economic releases in the US and the ECB’s decision. While US CPI was slightly above expectations, the underlying details remain consistent with disinflation. The PPI release and the abrupt drop in energy prices add support to the idea that inflation will continue to go down. The ECB delivered the 50 bps increase it telegraphed, but the market turmoil is making their next steps less clear and reduces their hawkish ambitions.
▪ Comparing to 10 days ago, government bond yields have dropped abruptly. Two-year yields went from 5% to 4%, a full 100 bps drop, while ten-year bond yields went down 50 bps. These drops are the biggest we have seen in such a short time span since the 1980s; they imply a major repricing of the path of interest rates from here, namely that the Federal Reserve is now really close to the end of the tightening cycle and likely to have to cut rates later this year.
▪ This major repricing of the interest rate path, alongside a clear support from government authorities have helped to support the broad equity markets, which end the week positive relative to last week, especially for the interest-rate sensitive growth stocks.
ON DECK FOR NEXT WEEK:
▪ On March 22, all eyes will be on the Federal Reserve as it will deliver one of its most important decisions in years. While it is likely that they will deliver on the market expectations for a 25bps rate increase, analysts will be looking at the press release and conference for hints regarding the subsequent moves and how the current banking pressures will impact their decision making.
▪ In parallel to that, we will continue to monitor the situation closely on the financial institutions front. A combination of time and policy support might help to stabilize the situation, but markets are likely to remain nervous for some time after such a substantial shock.