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By: Rhona O'Connell, Head of Market Analysis
Key points
Please see relevant charts and commentary following a quick look at the background
Key points:
Background
Silicon Valley Bank went into receivership with the Federal Deposit Insurance Corporation (FDIC) on Friday 10th March following a run on deposits as a number of tech start-ups, which were the primary focus of SVB’s operations, removed deposits after the bank had failed to sell a portfolio and needed to plug the ensuing hole in its balance sheet. Assets had been approximately $209Bn and this is being reported as the largest failure of an international bank since 2008.
SVB’s position shines a spotlight on potential systemic risks for parts of the banking system as cheap money disappears – that said, though, SVB is reported to have over-concentrated on one sector, and potentially over-lent likewise.
SVB had earlier in the week tried to sell a portfolio that partly comprised Treasuries, and which was offering a yield of less than 2%, against prevailing rates above 4%; this triggered a run on deposits and arguably the subsequent bank failure.
The FDIC has said that insured depositors (up to $250,000) should have access to their funds by Monday morning, while uninsured depositors will have a receivership certificate although the amount that will be available is still uncertain.
Government leaders, not just in the United States, have been moving fast to constrain any contagion. The Bank of England, for example, put the UK SVB arm into insolvency on Friday.
Further fall-out is likely to be constrained
The speed with which Regulators in the United States and beyond suggest that the fall-out from the SVB problems should be relatively limited. Anyway, the larger banks are well-capitalised and maintain prudent balance sheet management policies. U.S. Treasury Secretary Janet Yellen has said that she has “full confidence in banking regulators to take appropriate actions in response”. The lessons of 2018 were harsh, but have been learnt and led, inter alia, to the Dodd-Frank Act of 2010 that is fundamental in bolstering banks’ risk-resilience, notably with respect to capital adequacy and liquidity levels.
Market outlook fuzzy; key relationships (key points repeated from the introduction): -
The markets’ reaction on Friday, however, threw gold’s role as a risk-hedge into the spotlight. So here are a few charts to show key relationships.
Key asset performances in COVID-hit 2020
Source: Bloomberg, StoneX
COVID meltdown saw gold drop 12% from its early-March peak and had recouped its losses in less than five weeks.
The S&P lost 33% from its late-February peak and only recouped its losses 5-1/2 months later
Brent collapsed by 67% from late-February and took just under a year to break even
The US two-year and ten-year yields; short term and longer-term
Three-days
Source: Bloomberg, StoneX
Four years
Source: Bloomberg, StoneX
Gold and the 2Y rate plus correlation
Source: Bloomberg, StoneX
Gold and the S&P
Source: Bloomberg, StoneX
Gold and the S&P Banking sector
Source: Bloomberg, StoneX
The correlation between gold and the banking sector is normally inverse, but has been positive as the markets have looked at the Fed’s hiking cycle and the potential impact on each area
Gold and the VIX Uncertainty index
Source: Bloomberg, StoneX
Note the sharp increase the correlation with gold moving back towards positive territory. Ordinarily we might expect gold and the VIX to move in tandem but 2022 was anomalous – again this can largely be put down to the markets adjusting to the Fed’s shift in policy. So we can expect further caution and likely volatility. The U.S. inflation numbers are due on Tuesday; with the banking issues now to the fore this is likely to be a trading market this week rather than one geared towards large positions, at least until the dust settles. Next week sees the FOMC meeting and the associated dot plot. There is an English Nursery rhyme that talks of March Winds. This year’s market March winds are certainly looking boisterous.
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