The markets have been waiting for the jobs report what seems like forever. Not only was it delayed because February is a short month and the BLS felt that the 10th was doable – the 3rd was not, but the Fed Chair’s testimonies on Tuesday and Wednesday heightened market anxiety and anticipation.
And then Silicone Valley Bank rumblings started to permeate in the markets, and today, the regulators came in and closed down the 16th largest bank, and took control via a new entity. Overall, SVB was the 2nd biggest bank failure. The shares of SIVB are down -$66.55 on the day or -62.76% at $39.50. The stock traded as high as $763.32 in November 2021. On February 2, 2023, the price traded as high as $348.06.
The FDIC said that the depositors would have access to their funds on Monday. Those with deposits greater than the FDIC insured limit of $250,000 would get receivership certificates for the uninsured balances. Those businesses will unlikely get the money out soon, unless a knight in shining armor comes in to bail the bank out sooner rather than later. The total of uninsured deposits was 85% according to sources. Ouch
The bank is the 16th largest in the US with $209 billion in assets.
What now ?
What was not good for SVB may not be good for other banks.
In short, SVB owned government bonds and other qualified debt instruments. Those assets lost value as a result of the Fed’s aggressive tightening . When startup companies start to fail or burn cash over the last year, the deposit base started to dwindle. Moreover speculative funding into the bank started to slow down at the same time.
In order to cover the shortfall and to meet withdrawal requests, SVB was forced to sell government bonds at a loss and realize that loss. The bank tried to sell stock to cover that loss. When word of that got out, credit agencies looked to lower the rating. The stock price started to move to the downside. The stock issuance plans blew up, and the house of cards started to crumble as other depositors – especially those with assets over the FDIC insured $250,000 – looked to withdraw all their funds, and send their balances to larger money center banks. Of course SVB stopped that when they ran out of cash. The FDIC was forced to step in.
Other regional banks may not have the exposure of SVB, but that does not stop depositors from liquidating their accounts and moving their funds to bigger banks instead. If those smaller regional banks banks are forced to liquidate their bond holdings, they too may be forced to realize losses that they cannot sustain.
The story is far from being over. The only thing from keeping that story going is that the markets are now closed, but there will be long hours spent over the weekend looking for a suitable buyer. That buyer would want to buy the loans made mostly to startups. In a way, the bank was not a bank in the normal course of business. They seemed more a venture capital fund.
Today, what the markets started to price in was that the Fed is likely to slow down their tightenings in order to stabilize the financial system.
So instead of a 50 basis point hike in March – which would have been all but guaranteed given the US jobs data today which showed a higher than expected increase in nonfarm payroll jobs of 311,000 – rates plummeted on the expectations that the Fed would keep the hike to 25 basis points. Moreover, the terminal rate which was looking toward 5.75% (with some estimates pushing toward a 6% terminal target), has moved back to the downside as well. How far this story goes, will likely go in the equation for the Fed now.
Looking at the US debt curve the two-year note led the move to the downside in yields. The longer end was less impacted but they too were down double digits. Looking at the yield curve:
- 2-year note 4.588%, -31.2 basis points.
- 5 year note 3.966% -25.3 basis points
- 10 year bond 3.702%, -22.2 basis points
- 30 year bond 3.710%, -16 basis points
For the trading week,
- The 2 year yield reached a high of 5.085%. It is down -27 basis points on the week which is the sharpest fall since November 7, 2022
- The 10 year yield year yield reached a high of 4.089% last week. For this week it is down 25.2 basis points
- The 30 year yield reached a high last week of 4.047%. This week the yields down -16.4 basis points.
In the US stock market, concerns about a contagion sent stocks sharply to the downside:
- Dow Industrial Average fell -345.22 points or -1.07% at 31909.65
- S&P index fell -56.73 points or -1.45% at 3861.60
- NASDAQ fell -199.46 points or -1.76% at 11138.90
For the trading week all the major indices were sharply lower:
- Dow Industrial Average fell -4.44%, the largest decline since the week of June 13, 2022
- S&P index fell -4.55%, the largest decline since the week of September 19, 2022
- NASDAQ index fell -4.71% which was the largest decline since the week of October 31, 2022
In the currency market, in what was a volatile day for the greenback, the CHF is the strongest and the AUD is ending as the weakest of the major currencies today. The USD was the weakest and is still lower on the day, but sellers shifted focus to the AUD in risk-off flows in the late US session. The CHF was the beneficiary of flight to safety flows.
For the trading week, the USD was mixed versus the major currencies with gains against the commodity currencies (risk off in those currencies), and declines versus the JPY and CHF (safety). The greenback was little change verse the EUR and the GBP.
- Unchanged vs the EUR
- Fell -0.54% versus the JPY
- Up 0.10% vs the GBP
- Fell -1.57% vs the CHF
- Rose 1.69% vs the CAD
- Rose 2.73% vs the AUD
- Rose 1.43% vs the NZD
This week, the BOC kept rates unchanged, as did the BOJ in Kuroda’s last meeting. The Canada employment report was stronger than expected.
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