At the close of business last Friday, global equities were lower on the week amid a spike in concerns over the banking sector. The yield on the US 10-year Treasury note tumbled from 4.01% a week ago to 3.74% on Friday. The VIX rose to 23.6 from 19.3. The price of a barrel of West Texas Intermediate crude oil slipped to $76.65 from $77.50 a week ago.
CANADIAN ECONOMIC NEWS
As expected, the Bank of Canada held rates steady at 4.5% this past week. Our central bank is becoming more concerned about the high portion of income earned by Canadians that is being used to service debt. We expect our central bank will remain on hold for future rate hikes.
Note there are some Canadian companies that have ties to SVB in the US. However, it is minimal exposure and these companies are not represented in your portfolio. This did not, however, protect Canada from the fear of the stability of the banking sector and our TSX also saw a significant sell-off last week.
US ECONOMIC NEWS
Tuesday and Wednesday of this past week saw hawkish testimony on Capitol Hill from US Federal Reserve Chair Jerome Powell. Strong job openings data pushed fed funds futures to price in a half-point hike from the Fed at its next announcement on interest rates on March 22nd. Another strong employment report in which payrolls exceeded expectations, rising 311,000 versus an expected 225,000 rise, added to the certainty of a 50 basis point increase and, as a result, equity markets sold off.
Financials came under pressure on Thursday afternoon after two specialist banking companies made headlines. The first was Silvergate, a crypto-focused bank, which announced it would wind down operations because of the fallout from the implosion of FTX. The second was SVB, a Silicon Valley–based lender focused on technology startups. Shares in SVB fell more than 60% on Thursday and another 63% on Friday morning before its shares were halted. The bank was forced to book losses on securities sold to cover a rise in deposit outflows and then seek a buyer for the business after failing to raise capital on Friday. We believe that SVB’s woes are unique to its business model. Silicon Valley Bank (SVB) was certainly in trouble and was shut down on Friday by the California Department of Financial Protection and Innovation. This added to the continued sell-off as the news talked about the overall stability of the banking system in the US.
We were in conversation with your fund managers who reassured us of the financial stability of the sector. We expect that similar to the 2008 financial crisis, the largest banks in the US, which are well-capitalised, will see accounts and payment systems transferred from smaller banks to them over the next few months. We do not see a collapse in the overall banking sector. Tech firms dependent on financing will probably continue to see their share prices hit. However, the largest tech firms will probably weather this disruption with little impact on their operations. As clarity begins over the next few weeks, we expect to see a strong rebound.
US consumer price data is set for release next Tuesday, ahead of the Fed’s 22 March rate-setting meeting, but after this week’s banking jitters, markets are now betting that a more moderate 0.25% hike is more likely than an aggressive 0.5% one. Terminal rate expectations have fallen by about 40 basis points in the last session and a half.
EUROPEAN ECONOMIC NEWS
Europe was also in focus this past week as the European arm of SVB went into insolvency on Friday. Britain’s largest banks are in talks for a takeover of the operations of SVB UK.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
Ahead of a March 15th deadline, eighteen Japanese labour unions, representing 240,000 workers in the service, textiles, and distribution sectors, reached an agreement with employers on wage hikes averaging 5.3%. The settlement sets the stage for Japanese workers to enjoy a significant boost in real wages, a prime goal of Prime Minister Fumio Kishida.