by Haith Nori
March has seen a continuation of heightened volatility across global markets. Central banks across the developed world are considering more aggressive tactics for increasing interest rates as they are not yet achieving the desired result of reducing inflation quickly enough. Some find themselves re-assessing their originally estimated limits. The collapse of Silicon Valley Bank has created great uncertainty and fear within global markets as no one will want the history of the 2008 financial crisis to repeat itself. Governments acted quickly to prevent a financial crash. The Swiss National Bank stepped in to bail out Credit Suisse with a lifeline of $54 billion. Furthermore, UBS went on to merge with Credit Suisse.
At the beginning of March, at the Congressional Testimony, a hearing of the US Senate Banking Committee and House of Financial Services Committee, Jerome Powell suggested the possibility that interest rate hikes still have a long way to go, signalling that further, larger rate hikes may be needed. Markets reacted negatively to the announcement, sending equity markets lower. After an initial increase in bond yields, over the course of March these fell significantly.
On Friday 10th March, Silicon Valley Bank (SVB), the 16th largest bank in the US, collapsed, delivering the largest commercial bank failure since the 2008 financial crash. The bank was based in the Santa Clara region and at the end of 2022 had around $209 billion in assets. The main contribution to the collapse appears to have been a failure of management to properly manage the numerous risks that arise on bank balance sheets during periods of rapidly rising interest rates. The issue was further compounded by SVB’s concentrated exposure to the start-up and venture capital space, an area which has recent faced its own challenges which drove many of these companies to draw down on their deposit balances. The bank was heavily invested in long-dated Treasury Bonds whose value, as the Federal Reserve raised rates, markedly decreased. Silicon Valley Bank’s failure is the largest since Washington Mutual went bust in 2008, a hallmark that triggered a financial crisis that hobbled the economy for years’[i] leaving an uncertain atmosphere for many investors. Global markets in both equity and fixed income have reacted negatively to the news with Joe Biden promising to seek stronger regulations for banks in an attempt to reassure the public on the state of the economy. Nearing the end of the month, on 27th March, First Citizens bank ‘bought about $72bn of the assets of the failed bank at a discount of $16.5bn’[ii] leaving c.$90bn of securities and other assets with the Federal Deposit Insurance Corporation (FDIC). First Citizens are taking over the running of 17 Silicon Valley Bank branches and also acquiring all $119bn in deposits and loans, which were set up post the collapse of Silicon Valley Bank. Finally, the FDIC have stated the collapse may well lead to $20bn of losses for its deposit insurance fund, which is paid for by banks themselves through sector-wide levies.
On 14th March, US CPI data was released for the 12 months ending in February of 6.0%, down from January 6.4%, December of 6.5%, 7.3% in November, continuing its gradual decline since June (9.1%)! This is a more promising decrease since January showing progression has picked up again. On 22nd March, the US Federal Reserve made the decision to raise interest rates by 0.25% to a range of 4.75% to 5%, taking interest rates to their highest level since 2007 and marking the ninth consecutive month of interest rate hikes in the US. This is despite the situation of the Silicon Bank Valley collapse where analysts predicted a potential halt in altering interest rates. In the UK CPI data released was 10.4% for the 12 months ending in February, a slight increase from 10.1% in January. This is slightly disappointing as the figures had been showing a decline each month for the past several months: 11.1% in October, 10.7% in November and 10.5% in December. On 23rd March, in the UK the Bank of England announced another 0.25% increase in interest rates to 4.25% from 4%. Also, on 16th March the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 3.0% as they had originally signalled.
On Wednesday 15th April, Jeremy Hunt the UK Chancellor announced the 2023 UK Budget making various changes. Notably, the UK Pension allowance has increased from £40,000 to £60,000 per annum effective from April 2023. Energy price support will continue at the current rate for the next three months to June 2023, limiting typical household bills to £2,500 per annum and corporation tax will increase from 19% to 25% from April.
On 16th April, the Swiss National Bank swooped in to provide a $54 billion bailout to Credit Suisse in order to ‘shore up liquidity and investor confidence, after a slump in its shares had intensified fears about a global banking crisis’[iii]. A few days later UBS came to Credit Suisse’s further aid as the bailout from the Swiss National Bank was not enough, and ‘UBS will pay $3.2 billion for 167-year old Credit Suisse and assume at least $5.4 billion in losses from unwinding its portfolio of derivatives and other risky assets’[iv]. This leaves the Swiss Nation with only one universal bank; UBS Group AG.
In other assets, there has also been increased volatility. During March Gold reached its highest level for several months, Brent Crude dropped sharply at the beginning of the month to c.$73 and has since recovered slightly to end the month c.$79.77. The Dollar, after initially showing signs of strength, has decreased in value against the UK Pound, the Euro and the Yen. Both US 10 year Treasury notes and UK 10 year Gilts followed the same pattern of starting the month at strong levels reducing in yield to then slightly recover at the end of the month but still c.0.5%/0.4% lower in yield.
Overall, March continued the volatility witnessed in February across asset classes. The news of the Silicon Valley Bank collapse shocked global markets yet most Central Banks continued with planned interest rate hikes. Both Silicon Valley Bank and Credit Suisse have been bailed out. Brent Crude dropped sharply below $75 per barrel having started the month at c. $84 per barrel but recovered some of its losses by the end of March. Since the start of March, 10 year bond yields have generally fallen.
[i] https://www.reuters.com/business/finance/global-markets-banks-wrapup-1-2023-03-10/
[ii] https://www.theguardian.com/business/2023/mar/27/silicon-valley-bank-bought-by-first-citizens
[iii] https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/
[iv] https://www.reuters.com/business/finance/ubs-swallows-doomed-credit-suisse-casting-shadow-over-switzerland-2023-03-20/
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