(Bloomberg) — While the initial conversation was about Silicon Valley bank deposits and any potential impact to other banks around the world, investors have now turned their attention to a much bigger potential infected victim: the US economy.
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Without neglecting the risks within the financial system, some of the moves in the past seem overdue if you consider the net danger of “just” running another bank, especially in Europe.
However, if you consider the risks to stocks and sectors beyond the threat of a bank run, the big decline may not have even started. Stock markets were optimistic about the state of the economy earlier this year and increasingly priced in a no-landings scenario. Now, hard landing is not only back on the table but it may increasingly become the base case.
“We are now finally seeing the pain from the tightening and the SVB phenomenon has basically accelerated into a US recession,” says Frederick Hildner, CEO and founder of Confluent Capital.
The Bloomberg US Financial Conditions Index has fallen to the lowest level seen in the last year and is likely to decline further. “I’m concerned if we’re entering a time of very tight lending standards because of the impact it will have on the economy,” said Michael Schaol, CEO of Marketfield Asset Management.
Jane Hetzius, chief economist at Goldman Sachs, agrees: “It will be difficult to be completely sure in the near term that Sunday’s intervention will ease pressure on smaller banks, which play a larger macroeconomic role and tend to be significantly more conservative in their lending.” Can.”
This would potentially create a huge issue for companies as they could lose un-drawn credit lines, while at the same time struggle to get new ones. “The advice I would give to people in the business world is to get loans from high-quality banks before you need them. They may not be available,” says Schall.
Nomura’s Charlie McElligott called the latest developments an “unanticipated blow to financial consolidating conditions.” And it could prevent the banking system from working as a transmission mechanism in the long run, which would have a far more subtle effect on the economy than appears at this point, McElligott says.
Positioning in the markets suggests that steps have already been taken to protect investments for more than a short-term risk event. Factors like growth and value are being sold, while quality balance sheet and high market capitalization serve as hiding places. Tail-risk hedging is on the rise and open interest in VIX call options is at its highest level since 2019.
The risk to the economy from a monetary policy mistake has also increased as the Fed now has to douse two fires with just one bucket of water. Peak Fed-rate pricing is falling precipitously, with the year-end expected rate falling to 4% from 5.5% just a week ago, despite the inflation problem being resolved. “While we agree that more tightening will be needed to address the inflation problem if financial stability concerns take over, we think Fed officials should prioritize financial stability for now.” This is likely, says Hatzius, looking at high inflation as an immediate problem and a medium-term problem.
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