Turbulence in the Markets

THE first quarter of this year has been very mixed. Initially, there was hope that inflation would fall, and many forecasters held the view that interest rates could see a turning point by the second quarter of 2023. Some even speculating that the US federal reserve would cut interest rates by mid-2023 and that inflation rates would be approximately 2% by early 2024. Central Banks had other ideas, and even with inflation falling, the envisaged 2% could be a long way off.

In February, inflation in Europe began to rise again but many still speculated that because of the re-opening of China’s borders a downturn would not materialise, feeding into interest rate increases in March.

On the 8th of March, Silicon Valley Bank (SVB), a prominent lender to tech startups, announced that it would record a $1.8 billion loss after selling some investments to cover increasing deposit withdrawals from clients. This led to Moody’s downgrading of SVB Financial Group which led to SVB Financials stock crashing.

This in turn caused shares of the four biggest banks in America, JP Morgan Chase, Bank of America, Wells Fargo and Citigroup, to fall amid fears that other banks could be forced to take losses to raise cash. The declines wiped out a combined $52 billion in the market value these four banks.

On the 10th of March, the federal regulators closed SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver, making it the second-biggest bank failure in U.S. history. On the 12th of March, federal regulators announced they had taken control of a second bank, Signature Bank.

To stop panic in the market they announced that customers of both banks would get all their money back and also announced a new lending program for US banks to ringfence the problems. On the 15th of March across the Atlantic, Credit Suisse Group saw its shares hit an all-time low as worries about the financial system spread.

Other European bank stocks took hits, including France’s Société Générale and BNP Paribas and Germany’s Deutsche Bank. At this time U.S. regional bank shares fell again and S&P global ratings downgraded First Republic to junk status. In the days that followed Credit Suisse announced that it would borrow up to 50 billion Swiss francs from the Swiss central bank to prop up its liquidity.

Following this announcement, the shares of Credit Suisse increased. First Republic shares turned positive following reports that the US’s biggest banks were examining a joint rescue plan to improve the lender’s liquidity. The Federal regulators then announced that 11 banks had deposited $30 billion in to First Republic.

On the 19th of March, UBS Group, in a deal engineered by Swiss regulators agreed to take over rival Credit Suisse for more than $3 billion. On the 27th of March, the Federal Deposit Insurance Corp. announced that First Citizens Bank shares will acquire the bulk of Silicon Valley Bank’s assets causing shares in regional banks to then increase.

The turmoil of March seems to be behind us, however, the consequences will probably be felt in the economy for the remainder of 2023, especially for direct investors in the banks affected.

We will probably see tighter regulations in this area, meaning a higher cost of deposit. So far this year, the Federal Reserve and the European Central Bank continue to tackle inflation with interest increases of .25% and 0.50% respectively and it is likely that Central Banks will have to balance Financial Stability with tackling inflation, which could see a slowdown in interest rate increases.

In the year to March 2023 the US has recorded 5% inflation, this is down 1% from February, showing that prices are starting to be brought under control by their Federal Reserve. Rates in the UK remain high at 10.1% year on year to March, but it is expected inflation will fall rapidly in the coming months.

Inflation has started to come down across the eurozone, easing to 6.9% in March, from 8.5% in February, however, price growth is less than expected with markets pricing in a further 0.25% rate increase when the ECB meet at the beginning of this month.

The long and variable lags of monetary policy are kicking in. Central Banks are caught between choking off excess demand and curbing inflation versus avoiding serious disruption to financial markets and damage to economies as cheap money is withdrawn. Let’s hope they land the plane safely!