Week ended March 10, 2023
Risk markets wobbled badly this week, leading to a rally in risk-off assets, especially US Treasuries. There was a slew of news that mattered.
The biggest issue this week was the run on the US’s 15th largest bank, Silicon Valley Bank (SVIB), which ultimately resulted in the bank being taken over by US regulators on Friday. Regulators were left with little choice in order to (try to) contain any collateral damage into the broader US banking system. However, the damage for other banks as far as their share prices was severe – the KRE (middle market bank ETF) fell 16% WoW as investors fled from bank stocks. SVIB had a unique profile as far as its customer base, and clearly made some mistakes as far as asset maturity mismatches that led to its effective demise. Depositors are expected to recover all of their deposits eventually but amounts in excess of the FDIC-insured $250,000 could take time to recover since assets – some distressed – will need to be liquidated. This could prove very painful for emerging technology companies that had deposits at SVIB, since they might not be able to access their liquidity for some time. Small and mid-sized US banks are also likely to remain under the microscope as their asset-liability policies are scrutinised. I read that the bank’s branches will re-open on Monday.
Another banking failure that rattled markets this week involved crypto-focused Silvergate Capital (SI), one of two major banks for cryptocurrency-related companies. The company announced that the bank would be would down and liquidated, and that all depositors would be fully repaid. This was another blow to the cryptocurrency market.
Fed Chairman Powell, who faced a highly politicised inquisition from Congress this week, said that inflation was far from under control, and that the Federal Funds rate could be raised 50bps (rather than 25bps) at the next FOMC meeting. (As an aside, some of the questions from members of the finance committees of both chambers were embarrassing to say the least.) As banks came under scrutiny later in the week, the odds of a 50bps increase in the Fed Funds rate at the next meeting fell.
Employment data was mixed on the week. Weaker-than-expected weekly payrolls on Thursday before the bell were a reminder that tighter monetary policy will sooner or later take its toll on the US jobs market. This was followed on Friday morning by the US jobs report for February (here), which showed fewer jobs were added in February (compared to January) and the unemployment rate ticked up slightly (3.6%). Nonetheless, the number of new jobs added was above economists consensus expectations.
Perhaps lost in the muddle was President Biden’s draft budget, which as proposed would reduce the deficit by an estimated $3 trillion. It looks to be the opening salvo in a protracted negotiation around the US debt ceiling, and naturally, was rejected quickly by Republicans. Let’s be real – no one wants higher taxes (including me), but a bipartisan effect to reduce the budget deficit through a combination of higher taxes and lower expenditures – both appropriately targeted – would be welcome by investors. Given the nature of politics and the highly charged, highly partisan divide today, the overall dysfunctionality of Congress does not inspire confidence that anything positive along these lines could be achieved. Nonetheless, President Biden clearly set forth a number of revenue-raising tax increases that did not necessarily inspire investors, one of which was doubling the capital gains tax for those earning more than a certain amount.
Lastly, the Bank of Japan kept its dovish monetary policy intact following its monetary policy meeting at the end of the week.
MARKETS
The two worst performing areas this week, perhaps not surprisingly given the commentary above, were cryptocurrencies and US bank stocks. BTC was down 9.7% WoW, while the small-bank ETF KRE was down 16% WoW.
Equities around the work sold off, accelerating into the close on Friday. The only index that was positive this week was the Nikkei 225 (up 0.8% WoW).
In the US, all of the major equity indices were in the red, with the worst performing being the small cap Russell 2000 (down 8.3% WoW).
Yields on US Treasuries skyrocketed mid-week, but then bonds rallied strongly on Thursday and Friday benefitting from a combination of flight-to-quality and (slightly) weaker-than-expected economic data in the US. US Treasuries and gold both had solid WoW returns, as investors moved into risk-off asset classes.
Perhaps not surprisingly given the failure of Silvergate, Bitcoin, Ethereum and other cryptos were sharply lower on the week. The price of Bitcoin fell briefly back below $20,000 before slightly recovering at $20,187 to end the week. Still, BTC remains one of the best-performing assets YtD, up 21.6%
Go to the "Tables" section below to see more detail on index and asset class returns this week.
WHAT’S COMING THAT MATTERS
Economic data:
US: Feb CPI (Tues), Feb PPI and retail sales (Weds), housing data (Thurs) and Michigan consumer confidence survey (Fri)
UK: Feb employment date (Tues)
China: Feb retail sales (Weds)
Japan: various industrial / manufacturing data for Feb (Tues/Weds)
Eurozone: Jan industrial production (Weds), Feb CPI (Fri)
Upcoming central bank monetary policy meetings:
ECB – Mar 16th (this coming week) and May 4th
Federal Reserve – Mar 21st-22nd and May 2nd-3rd
Bank of England – Mar 23rd and May 11th
Bank of Japan – Apr 27th-28th and June 15th-16th
THE TABLES
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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