SVB collapse means more volatility in the stock market: What investors need to know

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It’s all eyes on federal banking regulators as investors scrutinize the Silicon Valley bank following its sharp market decline last week.

Analysts said the name of the game — and the key to a near-term market boom — could be a deal that makes depositors at Silicon Valley Bank, or SVB. And regulators’ efforts appear to be focused on soothing concerns over the companies’ ability to access uninsured deposits — most such deposits exceed the FDIC’s $250,000 cap — in order to prevent a similar run of events that might have caused SVB elsewhere. prevents from

“If there’s a deal tonight that doesn’t harm depositors, the market will be bullish,” Barry Knapp, managing partner and research director at Ironsides Macroeconomics, said in a phone interview Sunday afternoon.

Investors will assess the outcome to see whether it complicates the Federal Reserve’s plan to hike interest rates further and potentially faster than before in its bid to tame inflation.

SVB was shut down by regulators on Friday and acquired by the Federal Deposit Insurance Corp., which according to news reports was auctioning off the bank on Sunday afternoon.

Look: US and UK regulators consider ways to help SVB depositors, FDIC auctions assets – report

“We want to make sure that trouble that exists in one bank doesn’t cause contagion to others,” Treasury Secretary Janet Yellen said in an interview Sunday morning on “Face the Nation” on CBS. Joe SVB will save the bondholders and shareholders of parent SVB Financial Group SIVB,

“We are concerned about depositors and are focused on trying to meet their needs,” she said.

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Continued uncertainty could effectively leave Monday “sell first, ask questions later”.

B. Art Hogan, chief market strategist at Riley Financial Wealth, told MarketWatch in an email referring to 2007-2007, “In an already volatile market, the emotional reaction to a failed bank reawakens our collective muscle memory of the GFC.” Is.” 2009 financial crisis. “When the dust settles, we will find that SVB is not a ‘systematic’ issue.”

Weekend Snapshot: What’s next for stocks after Silicon Valley Bank collapse as investors await key inflation reading

Knapp warned that if depositors are forced to take the haircut, there could be market turmoil with significant potential downside for the stock, sparking other institutions. A deal that leaves depositors outright would lift the overall market and allow bank stocks, which went “rip” high last week, to “rip off” because they are cheap and the banking system is “completely . in really good shape.”

Muscle memory, meanwhile, was in effect late last week. Banking stocks fell sharply on Thursday, led by shares of regional institutions and extended their losses on Friday. A selloff in bank stocks dragged the broader market down except for the S&P 500 SPX.
Down 4.6%, nearly erasing the large-cap benchmark’s early 2023 gains.

Dow Jones Industrial Average DJIA,
saw a 4.6% weekly decline, while the Composite Comp,
declined by 4.7%. Investors sold off stocks but piled into safe-haven US Treasuries, causing a sharp drop in yields, which move in opposite directions to prices.

The failure of SVBs is being blamed on the mismatch between assets and liabilities. The bank caters to tech startups and venture-capital firms. Deposits grew rapidly and were placed in long-dated bonds, especially government-backed mortgage securities. As the Federal Reserve began aggressively raising interest rates about a year ago, funding sources for tech startups dried up, putting pressure on deposits. At the same time, the Fed rate hike triggered a historic bond-market selloff, which took a dent in the value of SVB’s securities holdings.

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Look: Silicon Valley bank reminds us that ‘things start to fall apart’ when the Fed raises rates

SVB was forced to sell a large portion of those holdings at a loss to meet the withdrawals, making it a weak share offering it was planning which further restrained deposits and ultimately led to its collapse. .

Analysts and economists largely dismiss the notion that SVB’s troubles mark a systemic problem in the banking system.

See also: 20 banks that are sitting on huge potential securities losses – as was SVB

Instead, SVB “appears to be a special case of poor balance-sheet management, with huge amounts of long-term bonds funded by short-term liabilities,” said F. Nielsen, group chief economics advisor at UniCredit Bank. A Sunday Note.

“I would stick my neck out and suggest that the markets are overreacting,” he said.

The implications for the Fed’s monetary policy path are also large. Fed-funds futures traders moved more than 70% of a sizable 50-basis-point, or half-percentage point, move in price last week after Chair Jerome Powell raised the benchmark interest rate at the Fed’s March meeting. . Lawmakers will need to increase rates more than previously estimated.

As the SVB plummeted, expectations reverted to a 25-basis-point, or quarter-point move, with traders also reducing expectations of when rates would peak.

Meanwhile, a flight to safety saw the yield on the 2-year Treasury note above 5% for the first since 2007, ending the week down 27.3 basis points at 4.586%.

The market reaction was not unusual, and should reverse once conditions around SVB calm down, Michael Kramer of Mott Capital Management said in a Sunday note.

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Powell said upcoming economic data will determine the size of the Fed’s next rate move. Market reaction to a stronger-than-expected increase in February non-farm payrolls, which was underpinned by a slowdown in wage growth and a rise in the unemployment rate, was tempered by the uproar surrounding the SVB.

“I think they will raise rates by at least 25 basis points and signal that more rate hikes are coming,” Cramer said. “If they unexpectedly hold off on a rate hike, it will send a warning message that they are seeing serious concern, leading to a significant change in their policy path, and that will not be bullish for stocks.”