Handelsblatt editor Michael Maisch analyzes the effects of the collapse of the Silicon Valley Bank on the markets.
When the stock market year 2023 began, most experts were skeptical. Analysts and strategists did not expect prices to collapse, but only very modest gains on the major stock markets. The reasons were obvious: rapidly rising interest rates, an impending recession and the risk of falling corporate profits.
Then a small stock market miracle began. The optimists took control of the stock markets. The hope that things might not turn out as badly as expected was enough for a solid rally at the beginning of the year. The leading US index S&P 500 gained around ten percent from January to the middle of last week. But that’s in the past: the collapse of the Californian Silicon Valley Bank (SVB) put an abrupt end to the stock market miracle.
In the past week, the S&P 500 fell 4.5 percent, the biggest drop since September 2022. Banks have suffered their worst losses since the Covid crash in the past few days. In Europe, too, the SVB crisis caused massive losses for financial stocks and the broader market. Deutsche Bank shares lost a total of around ten percent on Thursday and Friday.
Even if a new financial crisis seems unlikely (but not impossible) at the moment, the biggest bank collapse in the USA in over ten years has fundamentally changed the situation on the markets. Because the events surrounding the SVB shake one of the central theses that supported the upswing on the stock exchanges.
This thesis was: The turnaround in interest rates by the major central banks in the USA and Europe will not cause any major economic damage. Proponents of this thesis assumed that companies and consumers had secured the ultra-low interest rates of the past with long-term financing and that banks would benefit from rising interest rates through higher margins.
After the bankruptcy of the SVB: fear of the spread of the crisis
However, the rapid rise in interest rates is also causing book losses in banks’ portfolios, because old, low-yielding bonds are worth less than new, higher-yielding bonds. If, as with the SVB, customers suddenly withdraw so much money that the banks have to sell part of their portfolio, book losses turn into real losses and trouble begins.
The bond markets show how great the fear of the crisis spreading is. In the US, investors fled to safe investments on a large scale. Government bond prices rose significantly, while yields fell inversely. The move was most pronounced for two-year bonds, where yields fell nearly half a percentage point in two days — the sharpest move since the 2008 financial crisis.
A contributing factor was that investors are wondering whether the US Federal Reserve (Fed) can really continue to raise interest rates as much as planned if this causes massive problems for the banks.
Given this starting position, it is very unlikely that the markets will calm down any time soon. Because in the coming days there are several events that would have what it takes to get prices moving even without a banking crisis. US inflation for February will be released on Tuesday. The monthly rate, which reflects the dynamics better than the year-earlier comparison, is expected to fall to 0.4 percent after 0.5 percent in January.
The European Central Bank (ECB) will meet next Thursday. Another rate hike of half a percentage point is almost certain, but the communication from ECB boss Christine Lagarde will be even more important than usual.
More: Bankruptcy of the Silicon Valley Bank: What is now threatening the financial world.
First publication: 03/12/2023, 4:15 p.m.