The most discussed topic in markets heading into this week was the collapse of the Silicon Valley bank in the US. Signature bank, a commercial bank specialising in digital assets with $110 billion in assets, was the next casualty as it was closed this week by state regulators, making it the third largest failure in US banking history. The run on the banks has led to over $100 billion in market value being wiped out from US regional banks forcing policymakers to try and restore confidence in the security of the financial system. President Biden pledged emergency funds available for banks and ensured there would be stricter regulation.
US inflation data saw another fall as the inflation rate dropped to 6% (year-on-year) for February and core inflation (excluding food and energy prices) dropped to 5.5% matching expectations. This data point strengthens the consensus that we have seen the peak in inflation and the US Fed interest rate hikes are having their desired effect. Although US Fed Chair Jerome Powell is insistent on staying the course until inflation reaches the 2%, the SVB debacle and vulnerability of the nation’s banking system may change the Fed’s approach. Last week investors were almost certain the Fed would be raising interest rates by another 50bps, however the banking concerns could now lead the Fed to a lower increase, or even pause interest rate hikes.
The demise of Credit Suisse has been a gloomy one to watch as Switzerland’s second largest bank has battled multiple scandals since 2021. These scandals have led to consecutive losses reported and the stock market value has nosedived almost 90% from $91 billion to around $8.8 billion. Switzerland’s central bank has recently lent the bank up to $54 billion in an attempt to shore up liquidity and begin to restore investor confidence. The famous Savoy hotel located in Zurich has also been put up for sale to help raise additional capital.
On Thursday, the European Central bank raised interest rates by 50bps, a strong hike despite the thoughts of investors that policymakers would hold back on rate rises until the turbulence in the banking sector eases. However, ECB president Christine Lagarde has stuck to her fight against inflation stating that “the banking sector is currently in a much stronger position than where it was in 2008”. Also, she has set out a new framing for the ECB’s decision process that will consider financial data as well as economic data in order to gauge the impact higher interest rates were having on the economy. Despite raising interest rates, the market has lowered its expectation on the peak interest rate level in Europe from 4% to 3.25% on the back of this week’s banking issues.
Turning our attention to the UK, on Wednesday the Chancellor Jeremy Hunt delivered the UK Budget. His first bold claim was that the UK would be avoiding a technical recession this year. The budget was certainly meaty with several key measures unveiled; the easing of costly childcare costs, the continuation of the energy price guarantee for the next three months, a freeze on fuel duty, the follow through with the raised corporation tax to 25%, and a pension tax shake up with the aim to ease the UK’s workforce squeeze. Figures for the UK unemployment rate were released on Tuesday at 3.7%, staying the same as the previous month, however job vacancies continue to fall for the eighth month in a row. The UK has been stricken by public sector strikes with workers mainly protesting over pay failing to keep up with the rise in inflationVolatility returned to markets this week, with large swings in both equities and bonds. Sectors such as financials and energy, which had been the star performers in 2022 suffered the most. UK equities fell considerably on Wednesday, with the large-cap index suffering one of its worst days since 2020. Some of the strongest performing funds this week in portfolios were some of the laggards from last year. This strengthens our consistent message on the need for diversification in portfolios. It is impossible to predict the future however, history has shown us that during these uncertain moments opportunities are created for investors with a long-term horizon.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.