SVB’s collapse means more volatility in the stock market: What investors need to know
It’s all on the back of federal banking regulators as investors sift through the aftermath of the market-shaking collapse of Silicon Valley Bank last week.
The name of the game – and the key to the market’s near-term recovery – could be a deal that puts depositors at Silicon Valley Bank, or SVB, all over, analysts say. And the regulators’ efforts appear to be focused on allaying worries about companies’ access to uninsured deposits — most such deposits are off-limits. FDIC $250,000 — to prevent activities similar to the SVB subversion happening elsewhere.
Barry Knapp, managing partner and director of research at Ironsides Macroeconomics, said in a phone interview on Sunday afternoon: “If an agreement is signed tonight without affecting depositors , the market will recover strongly.
Investors will also assess the fallout to see if it further complicates the Federal Reserve’s plan to raise interest rates and potentially quicker than previously expected in an attempt to lower interest rates. inflation or not.
SVB was shut down by California regulators on Friday and taken over by the Federal Deposit Insurance Corporation, which is conducting a bank auction Sunday afternoon, according to news reports.
See: US and UK regulators looking at ways to help SVB, FDIC depositors auction assets – report
“We want to make sure that problems that exist in one bank don’t spread to other banks that are doing well.” Finance Minister Janet Yellen said in an interview Sunday morning on CBS’s “Face the Nation,” while ruling out the possibility of bailing out bondholders and shareholders of SVB, SVB’s parent company, SVB Financial Group. SIVB.
“We care about depositors and are focused on trying to meet their needs,” she said.
Continued uncertainty could prompt the “sell first, ask questions later” move into effect on Monday.
Art Hogan, chief market strategist at B. Riley Financial Wealth, told MarketWatch in an email, referring to the global economic crisis of 2007: “In an already chaotic market, the emotional response is for a failed bank that has reawakened our collective memory of the GFC.” financial crisis 2009. “When things calm down, we may see that SVB is not a ‘systemic’ problem.”
Weekend photos: What’s next for stocks after Silicon Valley Bank collapse as investors await key inflation
Knapp warned that market turmoil with the potential for a significant drop in equities could ensue if depositors were forced to cut back, potentially triggering a run-off in other institutions. An all-deposit deal would lift the overall market and allow bank stocks, which fell in price last week, to “go higher” “because they’re cheap” and the banking system “generally”. … is in really good condition.”
Meanwhile, muscle memory took effect last weekend. Bank shares fell sharply on Thursday, led by regional institutions, and extended Friday’s losses. The sell-off in bank stocks dragged down the overall market, sending the S&P 500
SPX,
down 4.6%, almost wiping out the early 2023 gains for large-cap companies.
Dow Jones Industrial Average
DIA,
saw a 4.6% weekly drop, while the Nasdaq Composite
COMPUTER,
down 4.7%. Investors sold stocks but flocked to the safe-haven US Treasuries, sending yields plummeting, which went against prices.
SVB’s failure was attributed to the mismatch between assets and liabilities. The bank caters to technology startups and venture capital firms. Deposits grew rapidly and were placed in long-term bonds, especially government-backed mortgage-backed securities. When the Federal Reserve began aggressively raising interest rates about a year ago, funding sources for tech startups dried up, putting pressure on deposits. At the same time, the Fed’s rate hike caused a historic sell-off in the bond market, causing the value of SVB’s securities held to plummet.
See: Silicon Valley Bank is a reminder that ‘things tend to fall apart’ when the Fed raises rates
SVB was forced to sell a large amount of those holdings at a loss to meet the withdrawal demand, which led them to plan a dilution stock offering which caused the deposit to continue to increase and eventually led to the collapse. its.
Analysts and economists have largely rejected the view that SVB’s difficulties mark a systemic problem in the banking system.
Also see: 20 banks are at risk of large securities losses – so does SVB
Instead, SVB appears to be “a rather special case of poor balance sheet management, holding large amounts of long-term bonds financed with short-term debt,” said Erik F. Nielsen. , the group’s chief economic advisor at UniCredit Bank, said. a Sunday note.
“I would stick my neck out and think the market was overreacting,” he said.
The implications for the Fed’s monetary policy line are also huge. Federal fund futures traders last week turned to pricing with a more than 70% chance of a benchmark interest rate rise of 50 basis points, or half a percentage point, at the Fed’s March meeting after Chairman Chairman Jerome Powell told lawmakers that interest rates will need to go higher than previously anticipated.
Expectations return to the 25 basis point or quarter point move as the SVB collapse unfolds, with traders also scaling back expectations for when interest rates could peak.
Meanwhile, a flight to safety saw 2-year Treasury yields, for the first time in the week peak at 5% since 2007, ending the week down 27.3 basis points. copy at 4.586 %.
The market reaction is not unusual, Michael Kramer of Mott Capital Management, said in a note on Sunday, and will reverse when the situation around SVB calms down.
Powell said the upcoming economic data will determine the size of the Fed’s next interest rate move. The market reaction to the stronger-than-expected increase in February nonfarm payrolls, which was capped by slowing wage growth and rising unemployment, was overshadowed by chaos surrounding SVB.
“I think they will raise rates by at least 25 basis points and signal that there will be more rate hikes,” Kramer said. “If they suddenly pause to raise rates, that sends a warning message that they are seeing something worrisome, causing a significant shift in their policy path and that will Not good for stocks.”