March 2023 Wrap Up

What were the key moments in the market this month? 

Crash and burn: Silicon Valley Bank and Signature Bank 

Silicon Valley Bank made history on March 10th as the largest financial institution to fail since the 2007-2009 global financial crisis. 2 days after, federal regulators seized Signature Bank. Let’s retrace the events leading up to the collapse.

On March 8, SVB announced that it needed to shore up its balance sheet and raise $2 billion in capital after booking a $1.8 billion loss from selling some of its investments to meet increasing withdrawal demands. The day after, SVB Financial’s stock plummeted when the market opened. Twitter-fueled bank runs followed as venture-capital firms begin pulling their money out and urged their portfolio companies to do the same. On March 10, SVB failed after a run on deposits and California regulators closed it down officially. Spooked by the sudden collapse, Signature Bank customers withdrew more than $10 billion in deposits. Not long after, regulators announced that they were taking over the bank to prevent the spread of banking contagion. 

Since then, President Biden has made a televised address stating that “Thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe.” The Federal Reserve also reported that banks had borrowed $11.9 billion from the emergency loan program that was implemented shortly after the collapse to reinforce the banking system.

ECB says “stick to the plan” 

On March 16, the European Central Bank stuck to its guns when it delivered a planned interest rate hike of half a percentage point, despite market turmoil over fears of a widening banking crisis. The European Central Bank still has “more ground to cover” when it comes to raising interest rates, as it battles soaring costs, its president Christine Lagarde said on Thursday. Lagarde remained firm that there was no compromise between price and financial stability in spite of calls for a reduction in the pace of rate hikes amid the banking crisis. 

“We expect the ECB to turn more dovish today and in the coming weeks, probably hinting at a slowdown in the pace and size of any further rate hikes,” said Carsten Brzeski, ING’s global head of macro. “Now that interest rates are in restrictive territory, every additional rate hike increases the risk of breaking something.”

Yen rises above banking drama in US and Europe

Japan’s currency, Yen is making the comeback as the go-to haven while US and Europe are faced with a banking crisis. Following SVB’s collapse and the Credit Suisse issue, the US dollar decreased by 0.7% and the Swiss franc experienced a drop of up to 2%. On the contrary, the yen surpassed all of its Group-of-10 counterparts in mid-March amid a spike in volatility, going against the current market trend.

“The yen seems more popular now than the Swiss franc, which is another safe currency, due to the emergence of the Credit Suisse issue,” said Ayako Sera, strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. Despite it all, the yen is still plagued with problems such as the country’s largest current account deficit and ultra-low interest rates.

Another 25 bps from Fed—but The End is in sight

All eyes were dead set on the two-day FOMC meeting last week which concluded with unanimous votes to press ahead with a 0.25% hike. The increase in lending rates from 4.75% to 5% is the highest level since 2007, driving home the point that price stability still remains a top priority. 

In light of the recent banking crisis, the FOMC stated that the US banking system was “sound and resilient” but there was uncertainty about the impact on the economy following the failure of two lenders. However, the US central bank hinted that it may soon end its aggressive streak of rate rises, stating that “some additional policy firming may be appropriate” to bring inflation back to its 2% target. The recent bank failures had affected the Fed’s decision-making, with officials considering halting rate rises before ultimately deciding on a 0.25% increase.

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