It was a turbulent week for markets as weakness in the banking sector took hold, prompting a sharp adjustment in interest rate expectations. This was first sparked by the collapse of Silicon Valley Bank (SVB) the previous week, shortly followed by the failure of Signature Bank on Sunday. While there was swift action by the government to backstop deposits, markets were on edge about the possible contagion effects as well as a sharper slowdown in the US economy. Before SVB was forced into insolvency, markets were expecting a 50bps hike at the Federal Reserve’s next policy meeting, but that is now seen as being off the table, with some expecting that the central bank may in fact hold rates steady. The release of February’s CPI figure which showed that inflation was easing, was somewhat hidden amongst the banking headlines.
Fragile sentiment around banks saw fixed income markets post large intraday moves, with the Ice Bofa Move index hitting its highest level since 2008. The yield on the 10-year Treasury note ended the week at 3.4%, while the more sensitive two-year note saw its biggest single-day fall since 1987 on Monday, ending the week at 3.85%. US equities also saw gyrations but were more resilient. While there were some attempts of a rebound it was no surprise that the financials sector lagged. First Republic suspended its dividend and posted its biggest ever weekly drop even as Wall Street banks stepped in to deposit $30bn into the bank. The energy sector also experienced sharp declines due to a fall in oil prices on heightened recession concerns. Meanwhile, communication services and technology shares advanced for the week. The S&P 500 and Nasdaq gained 1.4% and 4.4% respectively, while the Dow Jones was down 0.2%.
Bank worries were not only confined to the US, with Credit Suisse coming under renewed pressure which pushed it to a new record low. Not only had the Swiss banking giant revealed that there had been “material weakness” in its financial reporting but the Saudi National Bank, its largest shareholder, said that it would not be willing to invest further capital in the company. There was however a sigh of relief when the Swiss National Bank said that it would offer liquidity support to Credit Suisse. Meanwhile despite the tricky market environment the European Central Bank actioned a half a percentage point rate hike as previously stated last month, but stated that future rate decisions would be based off incoming economic data. For the week, the pan-European STOXX 600 declined 3.8%, led by the baking sector, while government bond yields moved lower.
Weaker sentiment was also evident in Japan, where the Nikkei 225 lost 2.9%. The ‘shunto’ wage negotiations were held, with some of the biggest Japanese companies agreeing to give their employees their largest wage hike in decades. Elsewhere in the Asia Pacific region, the Shanghai Composite and Hang Seng both gained. They were supported by signs of further support from Beijing, with the People’s Bank of China cutting its reserve requirement ratio by a quarter of a percentage point.
Latin American equities were also weak, with MSCI’s index for the region seeing its worst weekly performance in nine months given the banking crisis concerns. Meanwhile as investors moved into less risky assets, pushing up the US dollar, Latam currencies moved lower. Argentina’s Merval index was down 6.2 % in a week where its annual inflation rate for February soared above 100% for the first time since the end of the hyperinflation period in 1991. In Brazil, the Finance Ministry reduced its GDP estimates for this year, citing the impact of higher basic interest rates on activity and credit, plus reduced US liquidity.
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