Heightened volatility roiled markets throughout the week as the banking crisis continued to escalate, with liquidity concerns emerging from First Republic (FRC) and Credit Suisse (CS). Financials and Energy plunged and were the week’s worst-performing sectors as investors digested signs of further economic contraction. It is interesting to note that market participants fled to safety in the form of mega-cap tech, with the S&P 500 and NASDAQ rising 1.47% and 4.44%, respectively, for the week. Other major indices remained volatile, with the Dow Jones and the Russell 2000 ending the week -0.11% and -2.57%, respectively.
Markets began the week digesting reports that US regulators had guaranteed all deposits for Silicon Valley Bank (SVB) and will help facilitate the sale of the assets.1 In addition, the Federal Reserve will begin to offer loans to affected banks that can provide Treasuries, ABS and MBS as collateral.1 These measures aim to restore confidence in the banking sector and help prevent contagion at other banks with high uninsured accounts, large unrealized losses and investment portfolios with long duration.
Despite stabilizing efforts by regulators, bank stocks remained volatile as fears of systemic risk grew. Credit Suisse plummeted Wednesday when its delayed annual report was finally released, revealing “material weakness” in its financial controls and reporting.2 In response, the Swiss National Bank announced it would lend CS 50 billion Swiss francs3 Early Thursday morning First Republic Bank collapsed and trading in its shares was halted. It then recovered as reports of an 11-bank coalition led by Bank of America, Wells Fargo, Citigroup and JPMorgan Chase would inject $30 billion into the bank to assist with liquidity concerns and bolster confidence in the banking system.4 Bond yields collapsed, with the 2-year falling to 3.85% compared to 4.59% a week ago. In tandem, bond volatility skyrocketed to levels not seen since the 2008 financial crisis, as measured by the ICE BofAML MOVE Index.5
Meanwhile, inflation continued to rise, with the CPI ticking 0.4% higher in February and led once again by shelter and food costs.6 Conversely, PPI unexpectedly fell 0.1% in February, with chicken egg prices declining 36.1% to drive the majority of the decline in goods prices.7 January’s surprising retail sales report was not repeated in February: retail sales fell 0.4%, mainly driven by declines in auto sales, food services and drinking establishments, and furniture and home furnishing stores.7 The Federal Reserve is in a tough spot – inflation and the labor market remain stubbornly strong, but continuing to raise rates in the midst of banking crisis could exacerbate the situation. Fed fund futures are still predicting a 25bps increase at Wednesday’s FOMC meeting.8