The failure of technology sector lender Silicon Valley Bank has shaken investor confidence and prompted a rush to safe-haven assets such as bonds and gold. London — Global equities fell on Tuesday as a brewing US banking crisis prompted investors to lower their expectations for interest rate hikes, even ahead of important inflation data later in the day. As recently as a week ago, investors were just recovering from a reality check that prompted many to assume rates around the world were likely to head much higher and stay there for longer than previously expected.
In the past week, three US banks have failed, with Silicon Valley Bank’s collapse causing investor concern and leading to a rush into safe assets like bonds and gold. Global banking stocks have lost billions of dollars, and the government bond market has seen a significant rally. While the MSCI All-World index was down due to losses in Asian equity markets and European shares dipped for a third day, short-dated US Treasury yields rose slightly but remained at their lowest in six months.
Experts have compared the situation to the US savings and loans crisis of the 1980s rather than the 2008 financial crisis, with SVB being a less-regulated bank that grew rapidly in a stable environment but struggled with the rise in Fed rates in recent months. The issue is not believed to be a systemic global banking problem, but rather a problem with a smaller bank.
“When I look at (the savings and loans crisis), we had a very mild recession, even though we were worried about it at the time. We had a very big interest rate reduction after a very big interest rate increase,” he said.“(SVB) seems very unlikely to have very big systemic implications, particularly when US authorities have come in so quickly to start tackling it.”Overnight the VIX volatility index, nicknamed Wall Street’s “fear gauge”, neared six-month highs, and other indicators of market stress showed early signs of strain. An index of bond market volatility — the ICE BofA Move index — had hit a 14-year high by Monday’s close.
Watch the plumbing
The S&P banking index fell 7% on Monday, its largest one-day drop since June 2020. Shares in non-US lenders have come under intense pressure and a number of indicators of banking sector credit risk are showing signs of stress.“Interbank markets have become stressed,” said Damien Boey, chief equity strategist at Sydney-based investment bank Barrenjoey.“Arguably, liquidity measures should have stopped these dynamics, but Main Street has been watching news and queues — not financial plumbing,” he said.
Yields on government bonds from the US to Germany and Japan have dived in the past week. German two-year yields, which fell by the most at least since reunification in 1990, while Japanese yields have fallen by the most in decades.Elsewhere, the dramatic re-pricing of US rate expectations has knocked 1.5% off the value of the US dollar in the past week, which in turn has helped encourage a push into gold, a traditional safe haven that has gained 5% in the past week alone to trade at about $1,900/oz.
The dollar gained some respite on Tuesday and was last up 0.7% against the yen at ¥134.11 and up 0.3% against the euro at $1.070.Data at 12.30pm GMT on US consumer inflation had been a set piece for markets before the failure of SVB, but given the volatility, Tuesday’s figures may have little effect on expectations for the Fed’s meeting next week. “I always thought that with inflation where it was, that central banks would keep hiking until they broke something, which was especially likely with the yield curve so inverted. Now they have broken something, is that enough for a pause? Much will depend on whether markets and contagion risk can calm quickly enough,” Deutsche Bank’s Jim Reid said. Nerves have capped oil prices, with Brent crude futures slipping below $80 a barrel.
