All eyes are on federal banking regulators as investors work through the aftermath of last week’s market-cracking Silicon Valley Bank collapse.
The name of the game — and the key to a near-term market uptick — could be a deal that makes savers at Silicon Valley Bank, or SVB, sane, analysts say. And regulators’ efforts seemed to focus on addressing concerns about companies’ ability to access uninsured deposits — most such deposits exceed the FDIC’s $250,000 limit — to prevent similar runs like the event in which the SVB capsized to take place elsewhere.
“If a deal is struck tonight that doesn’t discourage savers, the market will bounce back strongly,” Barry Knapp, managing partner and research director at Ironsides Macroeconomics, said in a telephone interview Sunday afternoon.
Investors will also be assessing the fallout to see if it complicates the Federal Reserve’s plans to raise interest rates further and possibly faster than previously anticipated in its bid to dampen inflation.
SVB was shut down by California regulators on Friday and taken over by the Federal Deposit Insurance Corp., which held an auction of the bank Sunday afternoon, according to news reports.
To see: Regulators in the US and UK consider ways to help SVB depositors, FDIC reports on asset auction
“We want to make sure that the problems that exist in one bank don’t create contagion for others that are healthy,” Treasury Secretary Janet Yellen said in a Sunday morning interview on “Face the Nation” on CBS, ruling out a bailout. that would save bondholders and shareholders of SVB parent company SVB Financial Group SIVB.
“We are concerned about savers and are focused on meeting their needs,” she said.
Lingering uncertainty could drive a “sell first, ask questions later” dynamic on Monday.
“In what is already a jittery market, the emotional reaction to a bankrupt bank reawakens our collective muscle memory of the GFC,” Art Hogan, chief market strategist at B. Riley Financial Wealth, told MarketWatch in an email. referring to the 2007-2009 financial crisis. “When the dust settles, we will probably discover that SVB is not a ‘systematic’ problem.”
Snapshot weekend: What’s next for stocks after the collapse of the Silicon Valley Bank as investors await crucial inflation readings
Knapp warned that market turmoil with significant potential downside to stocks could ensue if depositors are forced to get a haircut, likely leading to runs at other institutions. A deal that leaves depositors intact would lift the overall market and allow bank stocks, which were hammered last week, to “tear” higher “because they’re cheap” and the banking system “as a whole…is really up for it” please”.
Muscle memory, meanwhile, was in effect late last week. Bank shares fell sharply on Thursday, led by shares of regional institutions, and extended their losses on Friday. The sell-off in banking stocks dragged the broader market down, driving the S&P 500 SPX,
a 4.6% decline, nearly wiping out the gains of the large-cap benchmark from early 2023.
The Dow Jones Industrial Average DJIA,
saw a weekly decline of 4.6%, while the Nasdaq Composite COMP,
decreased by 4.7%. Investors sold stocks but piled on US government bonds as a safe haven, leading to a sharp fall in yields, which move in the opposite direction to prices.
The bankruptcy of the SVB is attributed to a mismatch between assets and liabilities. The bank focused on tech startups and venture capital firms. Deposits grew rapidly and were placed in long-term bonds, especially government-backed mortgage bonds. When the Federal Reserve began aggressive rate hikes about a year ago, funding sources for tech startups dried up, putting pressure on deposits. At the same time, interest rate hikes by the Fed triggered a historic sell-off in the bond market, which caused a major dent in the value of SVB’s securities holdings.
To see: Silicon Valley Bank reminds that “things tend to break” when the Fed raises rates
SVB was forced to sell a large portion of those holdings at a loss to absorb withdrawals, leading it to plan a dilutive share offering that caused a further run on deposits and ultimately led to its collapse.
Analysts and economists largely rejected the idea that the SVB’s woes marked a systemic problem in the banking system.
Also see: 20 banks that are faced with huge potential securities losses – just like SVB
Instead, SVB appears to be “a rather special case of bad balance sheet management, with huge amounts of long-term bonds financed by short-term debt,” said Erik F. Nielsen, the group’s economic adviser at UniCredit Bank, in a Sunday note.
“I will stick my neck out and suggest that the markets are massively overreacting,” he said.
Implications for the Fed’s monetary policy also loom large. Fed-funds futures traders last week priced in a more than 70% chance of an outsized 50 basis point, or half a percentage point, hike in the benchmark interest rate at the Fed’s March meeting, after Chairman Jerome Powell told lawmakers that the rates should go higher than previously expected.
Expectations rose back to a 25 basis point, or quarter-point, move as the collapse of the SVB unfolded, while traders also reversed their expectations for when interest rates are likely to spike.
Meanwhile, a flight to safety caused the yield on 2-year Treasuries, which rose above 5% earlier this week for the first time since 2007, to fall 27.3 basis points for the week to 4.586%.
The market reaction was not unusual, Michael Kramer of Mott Capital Management said in a Sunday report, and should reverse once the situation around SVB calms down.
Powell said incoming economic data would determine the size of the Fed’s next rate move. The market reaction to a stronger-than-expected rise in nonfarm payrolls in February, which was dampened by a slowdown in wage growth and a rise in the unemployment rate, was clouded by the turmoil surrounding the SVB.
“I think they will raise rates by at least 25 basis points and signal more rate hikes,” Kramer said. “If they unexpectedly interrupt rate hikes, it would send a warning message that they are seeing something very concerning, causing a significant change in their policy path, and that would not be optimistic for equities.”
