The news last weekend that Silicon Valley Bank (SVB) collapsed was the oil on fire, for an already or uncertain stock market across the world.
The California-headquartered organisation, the 16th largest bank in the US, catering for the financial needs of technology companies around the world, made a series of ill-fated investment decisions led that has led to its collapse.
This shock reverberated throughout the banking sector and across the world, which saw depositors at mid-sized banks (like the First Republic Bank) became nervous, withdrew their deposits and shifted them to the big banks. This then placed the US banking sector in further turmoil.
What happened at SVB? The bank invested heavily in long-dated US government bonds, including those backed by mortgages, as a haven. But due to the Fed’s hawkish stance, increasing interest rates aggressively, bond prices had fallen sharply, given their inverse relationship with interest rates. As the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.
If SVB were able to hold those bonds for several years until they matured, then it would receive its capital back. Other mid-sized banks like First Republic Bank started to follow as economic conditions soured over the last year and customers started drawing on their deposits. To calm nerves, Bank of America, Goldman Sachs, JP Morgan and others offered to deposit $30 billion (R564bn) in First Republic last Friday, not only to contribute to First Republic Bank’s rescue, but also to avoid a run on deposits.
In a joint statement on Friday, the banks said: “The actions of America’s largest banks reflect their confidence in the country’s banking system. Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most.”
The banking ”crisis” had led to further sell-offs of US and global stock markets, especially at the end of last week. Although on Wall Street the Dow Jones Industrial index lost only 0.3% last week in volatile movements, it is still 5.8% lower than one month ago. The S&P500 lost 4.0% over the past month.
It was announced last week that the US inflation rate for February was 6.0%, down from 6.4% in January, but still way above the Fed’s target of 2.4%. Although many economists and analysts are of the opinion that the Fed will abstain in lifting its bank rate yet again at their next meeting this week, others remain positive that it will still be the case.
Domestically, despite the sharp increase in the prices for gold and platinum last week, equities performed – worrying some. The negative economic growth rate of -1.3% announced the previous week, the further downgrading by S&P of South Africa’s sovereign debt, as well as the EFF’s planned march today, as well as the US banking crisis, contributed to the All Share Index losing 6.61% in the past seven days. The index is now also negative for the first time since its opening on January 2, 2023.
Given the US banking crisis, gold as a safe haven shot up by $121 in the past seven days, from $1 867 to $1 988, and is moving in the direction of breaking through the $2 000 level as analysts had forecast at the beginning of the year.
Platinum lags trading around $982, while the oil price continues to fall sharply and ended last week on $72.87, boosting changes of a sharp decrease in petrol prices at the beginning of April.
This coming week investors and analysts will await the release of South Africa’s inflation rate for February. It is expected that the CPI had increased by 6.9% last month, only marginally lower than the 7.0% in January, calling for an increase in the repo rate by the Monetary Policy Committee at their meeting next week .
On global markets the interest rate decision by the US Federal Reserve this Wednesday will dominate markets. Up to the “new” banking crisis last week, it was generally expected that the Fed would increase its bank rate by another 25 basis points.
The UK will also announce its February inflation rate numbers and the Bank of England (BoE) will also release its interest rate decision on Thursday. It is expected that it will also increase its repo rate by 25 basis points. Other developed economies like Canada and Japan will also release their inflation rate numbers.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT