The collapse of Silicon Valley Bank (SVB) and fears of contagion have hit global bank stocks, rippling through to wider risk off market sentiment. Recent events could well be the first of many unintended consequences of a rapid shift from ultra-accommodative to restrictive financial conditions.
A flight to safety in response to the SVB collapse
Chart 1: Asset class returns since 7th March (SVB news)
Declines in global bank stocks and contagion concerns have rattled equity markets and economically sensitive assets such as oil since the news on SVB broke. This has also led to a flight to perceived safe-haven assets such as gold.
What started with US regional banks rapidly became global
Chart 2: Regional bank sector returns since the SVB news
The collapse of SVB was initially seen as isolated to the US with the US banking sector experiencing the worst of the sell-off in the few days that followed the SVB news. Contagion fears soon led to a sell-off in banks globally, with particular concern over the value of bond portfolios held by many institutions. In recent days the focus has shifted on to European banks, with the spotlight on Credit Suisse which saw its shares plunge by a quarter on the 15th March. As Chart 2 shows Asian banks, which are seen as relatively well capitalised have held up well and only seen modest declines.
Year end 2023 US market interest rate expectations plunge by 170bps
Chart 3: Contagion fears in the banking system have led to a dramatic decline in US year end 2023 rate expectations
The upshot of recent events has been the significant decline in US interest rate expectations. Markets had been ramping up rate expectations on the back of a sequence of strong economic data, pricing in a 50bps hike from the Fed at its March meeting. As the chart 3 shows, following recent events in the banking sector markets now expected the Fed to halt its tightening cycle, and are now in fact forecasting around 75bps of rate cuts by the end of the year to 3.9%.
Ultimately, the sharp fall in rate expectations could be an overreaction if the contagion proves to be limited. However recent events have created yet another conundrum for the Fed. SVB could be the first of many casualties to emerge as restrictive financial conditions start to take their toll.
Source: Wilshire, Refinitiv and Federal Reserve. Data as of March 15, 2023
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