Market Updates – March 19

Global markets were rocked at the beginning of the week when Silicon Valley Bank’s failure caused investors to revise their expectations for future interest rate increases and sell off bank stocks worldwide. The prices of government bonds experienced a significant surge, fueled by growing speculation among fund managers that the Federal Reserve would take decisive action to stabilize the global financial system. These market players now anticipate that the upcoming monetary policy meeting, scheduled for this month, will result in the Fed maintaining current interest rates. This represents a marked departure from the sentiment just last week when markets were preparing for a half-percentage point increase.

Silicon Valley Bank (SVB) was taken over by regulators as panicked customers rushed to withdraw their funds, presenting the largest challenge to the US financial system since 2008. However, on Monday, President Joe Biden addressed raising concerns promising to take all necessary steps to safeguard bank deposits and ensure the security of Americans’ money. Meanwhile, in the UK, the Bank of England facilitated a deal that saw the UK branch of SVB being sold to HSBC for a nominal sum of £1.

Across the Atlantic in the UK, the Bank of England played a critical role in brokering a deal that resulted in the sale of the UK branch of SVB to HSBC for a symbolic amount of £1. Meanwhile, in Europe, fears of contagion began to mount as the fallout from Credit Suisse reverberated throughout the financial markets.

The recent news regarding Credit Suisse has had significant ripple effects in the financial world. The decision by its primary investor, the Saudi National Bank, not to offer additional financial support led to a dramatic 20% drop in Credit Suisse’s stock value last Wednesday. The resultant contagion effect was widespread, leading to a significant downturn in European bank stocks. However, the Swiss Central Bank’s timely intervention, providing a generous loan of almost $54 billion to bolster Credit Suisse’s liquidity, helped to restore some stability. Nonetheless, the situation at Credit Suisse, coming so soon after the collapse of SVB, has raised concerns about the ability of major institutions to manage the impact of interest rate hikes.

Amidst the challenges facing the banking industry, the European Central Bank (ECB) has made good on its commitment to combat inflation by implementing a 50-basis point (bp) hike in interest rates. Despite recent financial turbulence triggered by US bank collapses and concerns surrounding Credit Suisse, the ECB remains resolute in pursuing its objective.