Since the financial crisis in 2008, we haven’t seen much turmoil in the global banking sector. However, that all changed late last week, when the United States’ (US) Silicon Valley Bank (SVB) took a tumble and Signature Bank closed its doors, sending global markets into a tailspin.
Key themes for this week include:
- Chaos in the banking sector has investors on edge
- US inflation slows to its lowest level since September 2021
- Oil falls to lowest levels since December 2021
BANKS IN THE SPOTLIGHT FOR ALL THE WRONG REASONS
Last Friday, Silicon Valley Bank, a lender to the Bay Area’s tech startups, venture-capital and private-equity firms, failed. This marked the biggest bank collapse since 2008, leaving regulators scrambling to contain further fallout and halt contagion risk. The collapse of SBV was, in effect, driven by a rapid rise in interest rates which hurt the bank, which was heavily invested in US government bonds.
As conditions in the tech sector have taken a negative turn, many of the SBV customers started withdrawing funds to meet their financial obligations. This in turn, forced SBV to sell their bonds at significant losses so that they could meet the cash demands of these withdrawals. Depositors became spooked and embarked on a 48-hour withdrawal frenzy that ultimately led to the bank’s demise, or as James Angel, an expert on market structure and global financial market regulation said to Al Jazeera: “SVB collapsed because of a stupid rookie mistake with their interest-rate-risk management. They invested short-term deposits into long-term bonds. When interest rates rose, the value of the bonds fell, wiping out the equity of the bank.”
To add to the banking sector’s woes, two days after the collapse of SBV, regulators seized the assets of crypto-friendly New-York-based lender, Signature Bank. US regulators, in conjunction with the US Federal Reserve (Fed), moved swiftly to manage contagion risk. Contagion risk is where the collapse of one bank leads to a run on other banks. The US government announced on Sunday, that they would guarantee all deposits placed with both SVB and Signature Bank.
However, the fallout in the banking sector was not limited to the US, but reverberated across all financial markets on Wednesday, when Credit Suisse, one of Europe’s largest banks, tumbled by over 30% after the bank disclosed that it discovered “material weaknesses” in its financial reporting, and the lender’s largest shareholder, Saudi National Bank, stating that it would not be rendering further financial support. The risk of Credit Suisse collapsing, however, is of much larger concern than SVB. The bank is not only a giant within the global banking system, it is also thoroughly integrated throughout the global financial market. As such, this news resulted in yet another turbulent few days in the financial markets, as investors rushed to safe-haven assets in an attempt to shelter themselves from further fallout.
In a joint statement with the Swiss Financial Regulator, FINMA, the Swiss National Bank aimed to bring stability to the market, by stating that Credit Suisse met all their capital and liquidity requirements, and that if required, the bank would provide liquidity to the Credit Suisse. Merely hours later, an announcement was made that Credit Suisse will borrow over $53 billion from the Swiss Central bank and buy back up to $3 billion worth of debt.
On Wednesday, the Dow Jones Industrial Average fell by almost 1% while European banking stocks tumbled, contributing to a 3% decline in the Pan-European STOXX 600 Index.
Market conditions remain uncertain, as investors try and anticipate what comes next. Are we in for further widespread financial market chaos, an interest rate outlook review by the Fed or even steeper banking regulations? Some believe we may be looking at a combination of all of the above.
DATA IN A NUTSHELL
The US’s annual inflation rate slowed to 6% in February 2023, its lowest level since September of 2021, in line with market forecasts, and down from 6.4% in January 2023. US food prices grew at a slower rate, while the cost of used cars and trucks continued to decline. Sharp declines in costs were also evident for energy and fuel oil, with gasoline prices falling 2% after a 1.5% rise in January 2023. Inflation in the US remains three times above the Fed’s target of 2%.
The number of Americans filing for unemployment benefits fell by 20,000 from the previous week to 192,000 in the week ending 11 March 2023, well below expectations of 205,000. This marked the biggest fall since July 2022, widely driven by the drop in claims in New York, where school workers returned to work after a school break. The result reinforced evidence of a stubbornly tight labour market and is in line with the hot payroll figures for February 2023. The tight job market forces employers to raise wages to attract and keep staff, magnifying inflationary pressure on the American economy.
In Europe, the European Central Bank (ECB) raised interest rates by 50 basis points as expected on Thursday, pushing borrowing costs to their highest levels since late 2008 as the bank tries to reduce the region’s stubbornly high inflation. Policymakers reassured the public that the banking sector within the European Union (EU) area was resilient with strong capital and liquidity positions, and that they were monitoring current market tensions closely. They stressed that the ECB was ready to respond as necessary to preserve price stability and maintain financial stability in the region. Regulators now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures will likely remain strong and core inflation is now expected to average 4.6% in 2023, higher than in the December projections.
The United Kingdom (UK) unemployment rate came in at 3.7% for the period November 2022 to January 2023, largely unchanged from the previous three-month period and slightly below market consensus of 3.8%. The number of unemployed people rose by 5,000 to 1.25 million, while employment levels increased by 65,000 to 32.84 million, driven by part-time employees and self-employed workers.
China’s industrial production advanced 2.4% year-on-year, outperforming the 1.3% gain in December 2022, but less than market forecasts of 2.6%. Manufacturing output quickened following the lift of the zero-COVID policy, while activity slowed for both mining and utilities. Retail sales expanded 3.5% from the previous year, in combined figures for January 2023 and February 2023, meeting market expectations and shifting from a 1.8% fall in December 2022. This was the first growth period in retail sales following declines in the previous three periods, and the strongest rise since August 2022. Numbers were buoyed by a recovery in consumption after Beijing abandoned strict COVID-19 restrictions at the end of 2022.
Gold production in South Africa increased 3.7% year-on-year in January 2023, marking the first increase in a year, while mining production fell by 1.9% for the same period, following an upwardly revised 3.6% decline in the previous month and compared with market estimates of a 2.65% slump. This reading marked the twelfth consecutive month of contraction in mining activity. Manufacturing production declined by 3.7%, following a downwardly revised 4.5% decrease in the previous month. This was the third consecutive month of declining industrial activity, amidst persistently high levels of load shedding and failing infrastructure. Retail sales dropped by 0.8% from a year earlier in January 2023, following a downwardly revised 0.5% decrease in the previous month and compared with market estimates of a 2% slump. It was the second consecutive month of declines in retail activity.
EQUITIES STABALISE AFTER VOLATILE WEEK
Wall Street recovered from a sombre opening on Thursday, with the Dow Jones wiping an over 200-point decline, to briefly cross into the green as regional banks’ shares regained ground after comments from Treasury Secretary, Janet Yellen. She told lawmakers that the American financial system is in good shape despite the collapse of two midsize banks. Sentiment gained additional support from a report claiming that large banks are in talks to support struggling regional lender First Republic Bank. The S&P 500 and Nasdaq outperformed by adding 0.7% and 1.3% respectively, with soft Treasury yields pushing investors into tech and other growth stocks.
Equities in London regained some positive momentum on Thursday, with the benchmark FTSE 100 recovering from its lowest closing level in three months, driven by gains in the financials and energy sectors, with fears around a global financial banking crisis abating. Knocked-down banking stocks, including Barclays and HSBC Holdings, rallied almost 4% on the news of financial aid for Credit Suisse. Meanwhile, Rentokil Initial, jumped more than 5% to lead the FTSE 100 after the pest control services provider lifted its medium-term outlook and posting a better-than-expected annual profit.
European shares gained on Thursday afternoon, with Germany’s DAX 40 advancing more than 1.5% to 14,960 after the ECB hiked interest rates by 50 basis points to combat inflation. Among single stocks, shares of Credit Suisse rebounded from a record low after saying it would borrow $53 billion from the Swiss Central Bank. Stocks had their worst day in over a year on Wednesday over fears of a wider financial crisis.
Japan’s Nikkei 225 Index shed 0.8% while the broader TOPIX Index tumbled 1.17% to 1,937 on Thursday, sliding to their lowest levels in nearly two months as turmoil at Credit Suisse exacerbated concerns about the stability of the global financial system. However, a potential banking crisis fuelled speculation that major central banks may take a less aggressive approach to policy tightening in order to prevent a severe recession. Japanese banks led the selloff.
The JSE FTSE All Share Index was trading higher on Thursday, after a seven-day losing streak that sent the index to its lowest levels in nearly four months. Industrials and financials provided the main support, while resource-linked stocks posted mild gains. Market sentiment improved globally after troubled European lender Credit Suisse received financial support, easing concerns of a looming banking crisis. Meanwhile, traders continue to assess the outlook for interest rates.
OIL TAKES A TUMBLE
West Texas Intermediate Crude futures fell over 1% to trade below $67/barrel on Thursday, a level not seen since December 2021, as investors fretted over risks in the financial system and prospects of higher interest rates. The Organization of the Petroleum Exporting Countries (OPEC) offered some relief to oil producers, as it raised its forecast for Chinese oil demand growth in 2023. The International Energy Agency also echoed a bullish outlook for oil demand, pointing to a massive boost from resumed air travel and China’s economic reopening after COVID-19 curbs. On the supply side, Saudi Arabia Energy Minister, Prince Abdulaziz bin Salman, said OPEC+ would stick to production cuts agreed upon in October 2022 until the year-end.
Gold prices gained to trade above $1,930/ounce on Thursday, close to levels not seen in six weeks. The risk-off mood persists as investors remain anxious about the recent banking turmoil and are still trying to assess the monetary policy outlook. The Fed is set to decide on monetary policy next week.
Copper futures fell to the $3.90/pound mark this week, their lowest level since early January 2023, as fears of banking instability dented expectations of higher demand from key consumers. In addition, industrial production in China missed projections for the first two months of the year. Tight supply, however, limited the pullback in copper prices. Mining exports from major producer Peru sank nearly 20% annually, in January 2023, due to the widespread protests that halted production activity.
DOLLAR INDEX SETS SIGHTS ON SIX-WEEK HIGHS
The US Dollar Index hovered near 104.5 on Thursday after jumping 1% in the previous session, underpinned by rising demand for safe-haven currencies following banking sector woes. Investors were concerned about the prospect of a global banking crisis and economic instability. The turmoil, however, fuelled speculations that major central banks could take a less aggressive approach to policy tightening in order to prevent a severe recession and markets anticipate that the Fed could soften its stance and only raise rates by 25 basis points next week.
The euro was volatile, trading around the $1.06 mark on Thursday, after the ECB delivered a 50 basis point rate hike, despite the ongoing banking turmoil. ECB President, Christine Lagarde, said last week that a big interest rate increase was “very likely”, but markets sharply reduced bets for a 50 basis point hike after SVB collapsed and European banking shares plunged.
The British pound continues to trade below $1.21, as investors assessed the possible impact of the European and US banking system turmoil, as well as stubbornly high inflation, on the outlook for monetary policy. The Bank of England is expected to raise interest rates by 25 basis points next week, before ending its current policy tightening cycle. Meanwhile, British Chancellor of the Exchequer, Jeremy Hunt, pledged on Wednesday to halve inflation, reduce UK debt and get the economy growing, saying the UK would not enter a technical recession this year and inflation would likely fall to 2.9% by the end of 2023.
The South African rand remained under pressure towards the end of the week, to trade around the R18.40/$, as risk appetite remained fragile amid recent turbulence in the global financial system. Locally, concern about a potential recession in South Africa, due to persistent high-stage load shedding, continues to weigh.
The rand is trading at R18.34/$, R19.53/€ and R22.29/£.