Summary and Comment
The past two weeks were packed with information and hot news.
First, the banking system failures and instability. On March 8, Silvergate Capital announced that it was going to wind down operations and liquidate its bank. Two days later, U.S. regulators closed Silicon Valley Bank after a bank run by customers. SVB was a major player in the startup ecosystem and among small businesses in the San Francisco Bay Area. On March 12, regulators closed Signature Bank in New York over fears it was running out of cash because customers were withdrawing their money (another bank run). The bank was focused on cryptocurrency clients.
Banks have very reduced reserve requirements (they are not required to keep much of your money in "the vault"!), thus in the event of a bank run, they quickly run out of cash, and need to sell some of their assets in order to meet the withdrawal demands. However, many of these assets are long-term treasuries, and its value has been decreasing over the past year (due to interest rate hikes), leading to big losses when banks sell them before the maturity date. The system is based on faith - a bank run is when people run out of faith in an institution.
On Sunday (12/03/2023), federal regulators also announced efforts to
stabilize the wider banking system. This looks like a bailout. The problem with this, as in other previous massive liquidity injections, it that it dilutes the value of money, creating more inflation in the long term.
After the instability, Goldman Sachs no longer expects the Federal Reserve to deliver a rate increase next week.
Let's take a look at the Silicon Valley Bank (SVB) case:
JPMORGAN: SVB “was in a league of its own,” with an “unusually high reliance on corporate/VC funding .. and very low reliance on stickier retail deposits .. Bottom line: SIVB carved out a distinct and riskier niche .. setting itself up for large potential capital shortfall.
First Republic Bank, which has also been damaged by the fallout from SVB’s collapse, disclosed it had received a $70 billion liquidity infusion from The Fed and JPMorgan Chase. In Britain, HSBC got a deal with regulators to purchase SVB’s UK operation — less assets and liabilities — for £1.
Credit Suisse shares fell to CHF1.69 per share – an historic low for Switzerland’s second largest bank. Other bank shares also suffered with bank collapses in the US. The Swiss National Bank (SNB) stands ready to provide Credit Suisse with
emergency liquidity, sending out a signal that the Swiss financial authorities will go to extraordinary lengths to avert the collapse of a bank deemed ‘too big to fail’. It is also probably designed to convince depositors to keep their money at Credit Suisse, thus avoiding a bank run. The SNB’s promise of emergency liquidity came after Credit Suisse’s largest shareholder, the Saudi National Bank, said it would not stump up any more money after injecting billions into the bank last year.
Large banks will "save" smaller banks with the help of authorities, buying their remaining good assets, and taking deposits from customers leaving the smaller institutions. The banking crisis is not over and markets in general, specially the bond market, are highly volatile. Limiting your risk might be prudent. Stay tuned for more collapses and any extra signs of systemic risk.
Economic Data:
Last week, the unemployment rate in the US edged up to 3.6 percent in February 2023, up from a 50-year low of 3.4 percent seen in January and above market expectations of 3.4 percent. The so-called U-6 unemployment rate, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, rose to 6.8 percent in February from 6.6 percent in January. The labor force participation rate inched higher to 62.5 percent, the highest since March 2020.
The annual inflation rate in the US slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January.
Producer price inflation in the US went down 0.1% month-over-month in February 2023, against market expectations of a 0.3% increase.
Despite the banking sector stress, the ECB raised interest rates by 50 bps as expected on Thursday, further pushing borrowing costs to the highest level since late 2008.
Next week, all eyes will be on the FOMC meeting and interest rate decision.
Economic Data Source: Trading Economics
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A Walk Around the Markets
The yield on the US 10-year Treasury note fell to the 3.4% mark in mid-March, the lowest in six weeks, as persistent concerns regarding the stability of the global financial sector ramped up demand for the safety of US government debt. The potential sale of the First Republic Bank extended the risk of a crisis in the banking sector after the collapse of Signature Bank and SVB. To add, the Swiss National Bank’s liquidity support for Credit Suisse offered a little relief for systemic risks to European lenders. Meanwhile, US unemployment claims figures were well below expectations in mid-March, reigniting concerns of a stubbornly tight labor market. Building permits also rose more than expected, supporting signals of a hot economy.
Source: https://www.ustreasuryyieldcurve.com/
US Dollar Index
Source: Trading Economics
The dollar index eased toward 104 on Friday, sliding for the second straight session as a rescue package for First Republic Bank eased market concerns about another bank failure in the US, lifting market sentiment while hurting demand for safe-haven currencies. Large US banks agreed to contribute $30 billion in deposits to First Republic Bank in a bid to shore up confidence in the banking system. Equities and risk-sensitive currencies rallied on the news, putting downward pressure on the dollar. The currency also weakened after the European Central Bank raised interest rates by 50 basis points despite the vulnerability of some European banks. Investors now look ahead to the Federal Reserve’s policy decision next week, where it is expected to deliver a more moderate 25 basis point rate increase in light of easing inflationary pressures and the recent banking turmoil.
Source: Trading Economics
Silver futures were trading shy of the $22 per ounce mark, close to levels last seen in February 2022, supported by a weaker dollar and concerns that the recent financial turmoil is far from over.
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