Stock market investors are getting a harsh reminder about the risks posed by banking industry turmoil.
(Bloomberg) — Stock market investors are getting a harsh reminder about the risks posed by banking industry turmoil.
US stocks are heading for the worst week of the year after a selloff sparked by liquidity concerns in the banking sector, as portfolio losses prompted hasty fundraising by SVB Financial Group, a major lender to fledgling companies. The jitters are spreading across the Atlantic, with European banks tumbling the most since June and the region’s benchmark index sliding sharply. Bond yields dropped to their lowest in weeks.
Any lingering optimism for equities now faces the test of the closely watched US payrolls data on Friday.
“By exposing its weakness, SVB has somewhat opened Pandora’s box,” Arnaud Cayla, deputy chief executive officer at Cholet Dupont Asset Management, told clients in a note. It represents “a major psychological impact, which has awakened the market’s old demons.”
Until now, stocks had held up relatively well to growing pressure from the bond market, where traders have priced in expectations rates would remain higher for longer than previously expected, hitting the economic outlook. While equities turned lower in recent weeks on increasingly hawkish Federal Reserve commentary, they’ve remained in positive territory for the year — Europe more strongly so — as investors sought stronger signs a recession is coming.
Strategists seeing limited risks of contagion from SVB to major lenders that are well-capitalized. Still, Wall Street’s reaction to the crisis and the abrupt shutdown of Silvergate Capital Corp. suggests investors had underestimated the fallout from higher rates on the economy.
“A lack of evidence has allowed equity investors to dream of an immaculate disinflation and a return to the mythical land of perpetual growth,” said James Athey, investment director at Abrdn. “The issues at SVB have been like a cold shower. With the Fed having just reiterated the idea of faster hikes, the potential for a very unhappy equity market should the jobs data surprise on the upside is very real indeed.”
Here’s what other strategists are saying:
Andreas Lipkow, strategist at Comdirect Bank:
“The optimistic market participants are facing a major test of their resilience today. In the US, risk hotspots are increasing rather than decreasing.”
The increasing willingness to speculate in zero-day-to-expiry options, the so-called ODTE products, “also poses a significant risk for the financial markets. In this situation, market participants are waiting for today’s US labor market data. It’s increasingly becoming apparent that the US jobs data is slipping into a lose/lose situation. Firm jobs data give the US Federal Reserve more leeway for further interest rate hikes and weaker data point to an economic slowdown. In this situation, equity investments in the US are not in a good light.”
Charles-Henry Monchau, chief investment officer at Banque SYZ:
“Banks have been caught off guard by the Fed’s rapid increase in interest rates and the draining of excess liquidity from the financial system. This has concurrently led to and a pile of losses on bank balance sheets.”
“For sure, SVB could somewhat be seen as an extreme (and hopefully isolated) event. But it’s fair to say that the double whammy of bond losses on bank balance sheets and a flight of customer deposits is creating a risk for many US banks.”
Bjoern Jesch, chief investment officer at DWS:
“It surely shows how nervous the market is after all, when problems at a relatively small Californian bank are enough to shake Wall Street’s financial behemoths.”
Robert Greil, chief strategist at Merck Finck:
“The ghost of interest rates is going around. Investors are increasingly concerned that interest rates will continue to rise further than previously expected.”
Greil expects two events to provide more clarity in this regard next week: “Firstly, it is important that the US inflation figures – including the core rate – are falling on Tuesday, and secondly that the ECB on Thursday will not put a stronger emphasis on higher inflation risks. Ultimately, the deteriorating financing conditions as interest rates continue to rise will affect the economy over the course of the year.”
Oliver Scharping, portfolio manager at Bantleon:
“While I’m getting arguably some Bear Stearns ‘08 vibes and liquidity is disappearing across the board, it doesn’t feel like a systemic issue yet. Frankly, so far there are only limited cross-reads for European banks. If the sector continues to remain under pressure in sympathy over the next few sessions, contagion could be an opportunity to add.”
Alessandro Barison, a portfolio manager at HI Numen Credit Fund:
“We think the sell off induced by SVB is overdone, it is not systemic and driven by a specific idiosyncratic reason. It, however, highlights competition in US with such high rates, and probably the end of NII expansion for US banks.”
Raphael Thuin, head of capital markets strategies at Tikehau:
“At first glance, this does not look like a systemic issue. Markets are very sensitive to bad news from the banking sector and worries about it are never good. That being said, one must be very vigilant about any kind of domino effect, particularly on regional US banks. The news about SVB also comes as net interest margins are expected to peak across US banks, which is adding to the pressure.
“About European banks, one has to do the due diligence, of course, but they are not exposed to the same risks and show no real sign of weakness on solvability and profitability. But again, prudence is of the essence in a context where markets are very sensitive to this type of event.”
Jerome Legras, head of research at Axiom Alternative Investments:
“That’s the thing with the banking sector, as soon as there is a problem on one bank, markets fear it’s everywhere but nothing is more wrong! The risk profile of a systemic bank like JPMorgan on rates and liquidity has just nothing to do with a Californian Bank specialised in VC.”
“Same goes with Europe where systemic lenders supervised by the ECB have a risk exposure to rising rates which is very limited. There’s just no comparison between the two. We’re in a environment of rising rates, yes, but that’s really not news.”
Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:
“It might not be a big damage caused by digital currencies and we were promised by the regulators that the system isn’t that fragile anymore. Well, today many asset managers will check their books and portfolios. Confidence must be displayed to prevent more selling pressure.”
–With assistance from Chiara Remondini, Allegra Catelli, Michael Msika and Macarena Muñoz.
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