March 2023

  • By Darren Scoon
  • 30 Mar 2023

Monthly Chatter

Friday 10th March was my wee brothers 50th birthday and we enjoyed a lovely family meal at his expense so a rare occasion indeed!!

It was also a pivotal moment in this years’ global economy as Silicon Valley Bank collapsed, this was the second of 3 American banks to collapse in the space of 4 days  ‘Beware  the Ides of March’ has never rung so true.

Since then, things have been very bumpy, we initially saw the years gains lost as investor confidence reduced and of course there was concern as Credit Suisse also failed and were taken over in a major move by UBS.

The media’s reaction was it’s another 2007/08 Banking Crisis, you’re probably aware that irresponsible journalism is a pet hate of mine so this didn’t land well with me!

It’s not 2008, thank goodness and the reasons behind the issues are very different.  In 2008, the banks predatory lending habits, along with excessive risk-taking by global financial institutions saw the US housing bubble burst.   Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to a collapse in value and the subsequent crisis.

This time round a regional US bank SVB was placed in receivership as it struggled to meet its obligations.  Why, well the bank which serviced technology start-ups grew too quickly, tripling in size in 3 years, it had too much money on deposit, insufficient loans and mortgages that were offered a low interest rates.   At central banks increased interest rates to combat inflation at a rate never seen before the bank couldn’t meet its obligations and was left exposed.

Credit Suisse was over exposed, had suffered significant losses after some poor management decisions resulting in several large fines and was working to downsize the investment bank but was unable to fix all of the problem and retain the confidence of customers.

Central Banks stepped in, guaranteeing depositor funds but the run had started so SVB collapsed.

UBS with support from the Swiss Government purchased/took over Credit Suisse in what must be the largest weekend purchase in history.

So What?

Despite all of the actions taken there remains a fragility and the banking sector remains under pressure.

Germany’s largest bank, Deutsche Bank, became the focus in the latest wave of selling last week across banking and wider financial stocks in the wake of the forced takeover of Credit Suisse.

The risk is one of contagion as investor confidence is low but also the volatile reaction of the markets, for instance following the news that the embattled Silicon Valley Bank had been bought by First Citizen Bank, its shares surged above 50%.

Market Update

The stock market has been relatively resilient this month, even with the collapse of three midsize U.S. banks. And in recent days, investor concerns about the banking industry have eased.

“Market fears of broader contagion are limited,” said Matt Orton, chief investment strategist at Raymond James Investment Management. “The market is starting to coalesce around the fact that this was not a systemic risk event. It was very idiosyncratic, and specific to issues at certain banks.”

On Wednesday, the S&P 500 ended at its highest level since March 6—shortly before the banking crisis began with the rapid, successive collapses of Silvergate Capital, Silicon Valley Bank and Signature Bank. Bond yields have also steadied after falling sharply.

In economic data, the number of workers filing for unemployment benefits is still historically low, the Labour Department said Thursday, despite an increase in claims last week. That shows the broader labour market remains robust despite large companies announcing layoffs.

“The implication is that people are losing jobs, but they’re getting new ones,” said Gina Bolvin, president of Bolvin Wealth Management Group. “So that goes to why the market is doing so surprisingly well this year, which is that the consumer is resilient and strong.”

Global stock markets have largely drifted higher during this comparatively quieter week, with fewer economic-data releases and earnings reports, and growing signs of stability in the banking industry. That has helped boost riskier assets.

“It feels like a bit of a calm after the storm,” said Viraj Patel, global macro strategist at Vanda Research. “We’ve had a lot happen in the last couple weeks that’s changing people’s assumptions about where markets go…and where we are in the cycle.”

Part of that stability has been driven by investors’ focus on interest rates, which many believe will peak faster than once expected, following the recent stress among banks. Federal-funds futures imply a 58% probability that the Fed won’t raise interest rates at its next meeting in early May, according to CME Group data.

With the first quarter ending Friday, the Dow is down 1.1% so far this year, and the Nasdaq Composite is up 15%.

So What?

The expectation Central Banks are still expected to raise interest rates another few times before they peak and then we can expect a steady reduction.

Expectation is that volatility will continue over the coming months although longer term growth outlook remains positive.