Weekly Market Update

SVB bankruptcy triggers swift response from the Fed

March 15, 2023
On Friday morning Silicon Valley Bank (SVB) had been the 16th largest US bank and a successful S&P 500 company, but by Saturday morning it was bankrupt after a sudden run on its deposit base had rendered it unviable.

Last week’s market action was supposed to be dominated by the Fed Chairman Powell’s testimony to the US Senate, where he was expected to re-emphasise the need to fight inflation with higher rates. That duly happened and markets were on the back foot as he appeared even a little more hawkish than expected. Then the widely anticipated US jobs report came in stronger than expected on Friday, which again seemed to suggest that this overheating economy needed to be hosed down by even higher rates. Just a few hours later though, the focus shifted abruptly to something that would send rates tumbling.

On Friday morning Silicon Valley Bank (SVB) had been the 16th largest US bank and a successful S&P 500 company, but by Saturday morning it was bankrupt after a sudden run on its deposit base had rendered it unviable. By the end of the weekend another medium sized bank had failed, and the US Federal Reserve, the Federal Deposit Insurance Corporation, and the US Treasury had stepped in to not only insure all depositors (including all those with balances above the $250k level insured by the FDIC), but also to provide generous loans to other medium and small US banks, measures that should, in theory, take away the incentive for depositors to flee and cause more bank runs. At the time of writing no more banks have failed (there are 40,000 so-called Regional US Banks) but the share prices of many of the banks still fell by 50% or more after the measures were announced, indicating that the market is not completely convinced that these echoes from the eve of the GFC won’t amount to a full-blown financial crisis.

SVB was relatively large, but it was still a niche specialist in funding tech companies, and it was uniquely (and unfortunately) exposed to rising interest rates, so if the essential ingredient of any banking relationship – trust – can be restored, then the market volatility will likely pass, especially as post-GFC leverage levels in the US banking system are relatively low and deposit levels are relatively high. It does however highlight the tightrope that the Fed is trying to navigate. On the one hand, there is still a clear need to keep raising interest rates, as evidenced by the overnight release of the US CPI, where core inflation, as expected, declined slightly but remains high and only edging downwards.  On the other hand, the world has just been abruptly reminded of the operational and financial leverage that exists in both the real economy and the financial, following a decade of low rates and abundant financial liquidity.

SVB’s main clients, technology start-ups and venture capital funds, have found it more difficult to borrow or attract equity to fund their growth ambitions recently, and it was their increased demand for cash that forced the bank to realise losses on long dated treasuries that it had carelessly assumed it would hold to maturity decades in the future (thereby avoiding the need to acknowledge the fall in market values experienced as rates rose in 2022). This broader perspective explains why the market has suddenly questioned the ability and commitment of the Federal Reserve to raise rates much further. Or it might be that the market does think this episode will turn into a recessionary bust (1 year inflation expectations have also dropped sharply). Either way, the following graph shows how quickly the market moved from anticipating higher rates last Wednesday to shaving more than a percent off the Fed’s so-called terminal rate (the peak of this hiking cycle) later this year.

This implies that multiple further rate hikes in this cycle got taken off the table (by the market at least), which is quite big news if that turns out to be the case. Perhaps even more surprising is that this also seems to apply to Australia, underscoring the extent to which our financial system is affected by global funding conditions and particularly those of the US. Long term rates just took quite a big step down, and perhaps explains why markets have actually held up relatively well under the circumstances (as lower future rates mean that future cash flows are discounted by less and are worth more in current dollars).

Interest rate markets have settled, and equity markets have only lost about 4% over the last week or so, with the US market down a bit more, which under the circumstances perhaps shows a degree of resilience. As one might expect financials led the market down, but due to the implications for tech funding in particular, mid to small cap tech stocks were also down by a similar amount. These represent the typical biases of value and growth managers respectively and has given both camps something to think about. The large tech titans remained relatively unscathed, while defensive sectors like utilities and consumer staple stocks were up a few percent. Gold and government bonds were also up by a similar amount, and while credit spreads eased a bit there were few signs of contagion into the corporate bond markets, and most credit portfolios were flat, with junk bond portfolios only down a couple of percent. Volatile oil markets were on the back foot, and most industrial metals were flat or mixed, again suggesting that the impact on the real economy is so far seen to be muted.

Booming Small Caps to Bond Spreads Tightening

August 2, 2024
It was a mildly positive week for global markets, with the S&P/ASX 300 gaining 0.7%. International developed markets were down 0.4% in AUD terms as measured by the MSCI World ex-Australia index.
Read More

Big Tech Flexes Its Muscles With Late Week Surge

August 2, 2024
It was a mixed week in global financial markets as the market continued to assess the likelihood of a hard or soft landing next year and the implication for inflation and interest
Read More

Santa (Powell) Has Come Early For Markets

August 2, 2024
The last week in markets, as is often the case, was totally dominated by the US economy and monetary policy. In this case it was an encouraging inflation print on Wednesday, followed by the US Fed’s decision to keep rates on hold the next day.
Read More

Recap of 2023: Two Stories With The Same Ending

August 2, 2024
This week started with more optimism about the US economy and further stock market gains until a sharp pullback on Wednesday snapped the US market’s nine-session winning streak. Thursday then saw a recovery, putting the S&P 500 back on track for an eighth week of gains, after US inflation data showed a gradual economic cooling in line with Fed hopes.
Read More

Rocking the Boat - Equities Stumble After Big Tech Selloff

August 2, 2024
After outsized gains in big tech stocks last year, global equities have stumbled over the past week amidst a tech selloff, challenging the notion of their invulnerability and potentially signaling a shift in market optimism tied to recent liquidity trends.
Read More

Markets Shrug Off Surprise Upside in US Inflation

August 2, 2024
Despite a higher-than-expected rise in US CPI for December 2022, markets remained relatively sanguine over the implications for growth and monetary policy.
Read More

Investors attempt to price in the invasion and the ensuing sanctions on Russia

August 2, 2024
After repeated warnings from Western intelligence, which most geopolitical experts were skeptical of, Putin invaded Ukraine. Markets fell sharply, especially in the US, but later rebounded and ended the week flat (or up by 2% in the case of the US).
Read More

Commodity markets continue to climb and push on inflation

August 2, 2024
It was another volatile week for stock markets, and even more so for commodity, currency and bonds as investors struggled to digest the implications of expelling Russia from the global economy.
Read More

London Metal Exchanges halts nickel trading as volatility threatens solvency

August 2, 2024
It was another volatile week for stock markets, and even more so for commodity, currency and bonds as investors struggled to digest the implications of expelling Russia from the global economy.
Read More

Fed raises rates for the first time in 2 years since Covid

August 2, 2024
For the second week in a row, markets looked through the current horrors of the Ukraine war and were up between 2% (Australia) and some 6% (for the S&P 500). That leaves European markets down slightly since the war started on 24th February, the US level pegging, and the resource rich Australian economy up almost 5%.
Read More

Another week, another odd rally

August 2, 2024
Markets were up again last week for the third week in a row which leaves the US, Japan, and Australia up over 5% and even Europe up a few percent since the invasion of Ukraine.
Read More

March confounded many market watchers

August 2, 2024
Another mostly positive week for shares left markets in positive territory for March despite, or perhaps even because of the war in Ukraine, with Australia, the best performing market up by almost 6%. This was mostly thanks to Energy stocks and in Australia’s case Iron Ore prices as well as the other commodities that we produce.
Read More

Markets slid again last week, with a concentrated sell off in US tech

August 2, 2024
Markets slid again last week but the selling was concentrated in US tech, most of which is down 10% or so this year. Much of last week’s selling occurred in the last 2 sessions of the week.
Read More

Recession fears build, yet equity markets end the week higher

August 2, 2024
Fears of a US recession later this year gathered pace last week and the US equity market jumped by almost 7% and the Nasdaq was up some 9%.
Read More

Inflation - Flash Update

August 2, 2024
In light of the recent inflation data coming out of the US, we dive in to why the market is so upset about a 0.1% increase in prices, and what this means from an Australian investor's perspective.
Read More

Interest rate sensitivity persists into the new year

August 2, 2024
During the last few weeks, the prospect of rising interest rate expectations continued to grip markets, as the soft landing/rapid disinflation thesis was tested.
Read More

Strong start to the year continues despite recession concerns

August 2, 2024
As the world’s elite gathered in a snowless Davos, markets focused on much more immediate concerns, starting with the continuing wave of layoffs in corporate America. Amazon, Microsoft, Alphabet (Google’s parent company), Salesforce and Goldman Sachs, among others, took turns to announce staff cuts. It would appear boardrooms and CEOs are lending some credence to the possibility of a recession in 2023.
Read More

Equities turbulent but resilient as interest rates rise

August 2, 2024
Last week the S&P 500 traded in a 3% range, having done a 2% round trip on Thursday, followed by a 3% fall on Friday after the inflation data release and then another almost 2% round trip yesterday. Emerging markets were the worst performing, down 4% for the week. Taking a step back though, most equity markets haven’t given back that much of their gains from January, while Europe and the Nasdaq remain up 10% for the year.
Read More

Helping your clients assess the climate impact of their Portfolio

August 2, 2024
Nathan Fradley explains how the ethosesg technology can help you assess and design an ethical portfolio that aligns to an investor’s personal values.
Read More

Carbon credits and investing – is it the outcome we expect?

August 2, 2024
ETFs that invest in carbon credits are now available. Why should we assume that their price will go up over time? And does buying a carbon credit ETF actually contribute positively to emissions reduction? Will it actually generate the outcome investors are expecting? This article explores the issues around investing in carbon credits.
Read More

Better World makes a difference with investment in renewables

August 2, 2024
There are many direct assets and funds that contribute positively to climate action within the InvestSense Better World Portfolios. Meridian Energy is one of the stand-out direct assets in the portfolio with a climate energy focus.
Read More

Bad news equals good news

August 2, 2024
In recent years professional investors have got increasingly used to the fact that good news is bad news for markets because higher interest rates are likely to be necessary, and of course vice-versa. However, last week the effect was stronger than ever and stocks rallied mid-week amidst reports of widespread lay-offs and expectations of a weak US jobs report.
Read More

‘Buy the dip’ opportunism start surfacing

August 2, 2024
The US market finally market caught a bid last week. Early in the week the market was down few percent after an earnings miss by ad dependent social media platform Snap (of Snapchat fame) combined with weak guidance raised more doubts about the economy and economic resilience of tech companies.
Read More

US momentarily dips into official bear market territory

August 2, 2024
The seventh negative week in a row for the US sent it briefly into official bear market territory before it recovered slightly late on Friday. The world’s largest stocks (Apple, Microsoft Amazon and Google) are all down 25%.
Read More

How Mark Lewin saved 13 hours a week with Managed Accounts

August 2, 2024
Mark Lewin was a financial planner, but is now the Director of Back Office Heros. In his planning business he gained significant efficiencies by recommending and implementing managed accounts for his clients. He tells us how...
Read More
Icon of a letter

InvestSense insights, delivered straight to your inbox.

Icon of a letter

Get the latest industry news

Icon of a letter

Get the latest industry news

Icon of a letter

Get the latest industry news