Money Matters 15 March 2023

Stocks slide on Silicon Valley Bank collapse

Most major stock markets fell last week as the collapse of Silicon Valley Bank (SVB) sparked a sharp selloff in global banking stocks.

US indices gave back nearly all their year-to-date gains, with the S&P 500, Dow and Nasdaq sliding 4.6%, 4.4% and 4.7%, respectively. Investor sentiment had already been hit by Federal Reserve chair Jerome Powell’s testimony to Congress on Tuesday. Powell warned that the ultimate level of interest rates is likely to be higher than previously anticipated because of strong economic data, although the collapse of SVB on Friday means the future path of interest rates is now highly uncertain.

Concerns about stress in the banking system also weighed on stocks in the UK and Europe. The pan-European Stoxx 600 fell 2.3% and the FTSE 100 slid 2.5%, despite better-than-expected UK gross domestic product (GDP) figures.

In China, the Shanghai Composite suffered its worst weekly loss in more than two months after Beijing set its lowest-ever annual growth target of just 5.0% for 2023.

Last week’s market performance*

• FTSE 100: -2.50%
• S&P 500: -4.55%
• Dow: -4.44%
• Nasdaq: -4.71%
• Dax: -0.97%
• Hang Seng: -6.07%
• Shanghai Composite: -2.95%
• Nikkei 225: +0.78%
• Stoxx 600: -2.26%
• MSCI EM ex Asia: -0.69%

* Data from close of business on Friday 3 March to close of business Friday 10 March.

Selloff continues on fears of SVB contagion

The global banking selloff continued on Monday as attempts to limit the fallout from SVB’s collapse failed to reassure investors. It came after US regulators on Friday shut down SVB and took control of its customer deposits in what has been described as the largest failure of a US bank since 2008.

SVB has a specific business model which made the bank more fragile than many of its peers. It saw huge deposit growth during 2021, which it consequently invested at low yields. It subsequently saw large deposit withdrawals, ultimately requiring it to sell bonds at a loss. Its large deposits typically exceeded the threshold for deposit insurance, which meant they were more likely to flood out in the event of apparent weakness. Without the confidence of its depositors, SVB was unable to trade.

The failure spooked customers at Signature Bank, which was also taken over by regulators on Sunday in an attempt to protect depositors and the stability of the US financial system.

On Monday, the FTSE 100 fell 2.6% to hit a two-month low, despite HSBC announcing that it agreed to buy the UK arm of SVB for £1. US indices also fell, although losses were limited by speculation that the Federal Reserve could ease up on interest rate hikes to reduce the risk of failure at other banks.

UK economy bounces back

SVB dominated the headlines last week, but we also saw the release of some important data on UK economic performance. Figures released by the Office for National Statistics (ONS) showed the UK economy bounced back in January, with GDP rising by an estimated 0.3%. This was higher than forecasts of 0.1% growth and significantly better than the 0.5% contraction in December. The bounce back was driven by the services sector, which grew by 0.5% in January after falling by 0.8% in December. Meanwhile, production declined by 0.3% and construction output decreased by 1.7%.

Looking more broadly, GDP was flat in the three months to January and over the last 12 months. The UK also remains the only G7 country with an economy that is smaller than before the pandemic. The British Chambers of Commerce said last week that while the UK is likely to avoid a technical recession in 2023, it will still shrink by 0.3% and won’t return to its pre-pandemic size until the final quarter of 2024.

US nonfarm payrolls beat forecasts

Over in the US, the closely watched US nonfarm payrolls report showed the pace of hiring in February beat forecasts, with solid growth in the private and public sectors. According to the Department of Labor, nonfarm payrolls grew by 311,000, well above the expected 225,000.

New jobs per month

Source: Refinitiv Datastream

Prior to the collapse of SVB, signs of strong jobs growth would have supported the case for further interest rate hikes. But even without the interest rate uncertainty caused by the fallout, the report did show that wage growth moderated to its slowest monthly pace since February 2022, while the unemployment rate ticked up slightly to 3.6%. The Fed’s next policy meeting on 21-22 March could prove to be one of the most anticipated yet.

Eurozone GDP growth revised lower

GDP growth in the eurozone was revised down from 0.1% to 0.0% in the fourth quarter, adding to concerns about the bloc’s economic performance. Household consumption saw the largest decline since the eurozone was formed in 1999 (excluding the Covid-19 slump) and investment dropped sharply. Meanwhile, employment growth was revised down to 0.3% quarter-on-quarter from a previously reported 0.4%.

Nevertheless, the European Central Bank (ECB) is expected to raise interest rates by another half a percentage point on Thursday after core inflation (excluding food and energy) hit a fresh record high of 5.6% in February. There is some speculation that the collapse of SVB could result in a more cautious approach to interest rates when the ECB meets again in May.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][zuperla_single_image image=”23486″ inherit_align=”left”][/vc_column][/vc_row]


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