Monday Market Minutes: Another Silly Con Job
PUBLISHED
2023-03-12
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It was a conjunction of events that no one thought was possible - while there was always the chance that the jobs data for February could upset Wall Street on Friday after the shock of January’s 517,000 new jobs, no one thought the collapse of an obscure West Coast bank would rattle markets and draw attention away from the Fed and its next rate rise decision.
Which is precisely what the collapse of Silicon Valley Bank (SVB), one of the fastest failures in recent times and the biggest since the GFC in 2008, did – all in less than 24 hours, really.
While the impact of the 311,000 new jobs in February worried investors early on, those fears were quickly overtaken by the news about SVB, a key lender to tech start-ups and other companies.
Which would make it the second biggest bank collapse in US history after Washington Mutual.
By Friday’s close the Dow had dropped for a fourth day in a row, finishing 345.22 points lower, or 1.07%, to close at 31,909.64. The key S&P 500 lost 1.45% to settle at 3,861.59 and while the Nasdaq shed 1.76% to end at 11,138.89.
All the major averages ended the week with big losses. The Dow fell 4.44% to post its worst weekly performance since June. The S&P dropped 4.55%, while the Nasdaq lost 4.71%.
Besides the US slump (which has wiped most of 2023’s gains), Eurozone shares fell 1.8%. Chinese shares also fell 4% because the trade and inflation data were not upbeat enough.
While Australian shares were initially boosted by a less hawkish RBA, they succumbed to the global weakness down 2% for the week with falls in resources, health and financial shares leading the declines. Bond yields mostly fell and the Aussie dollar hit a 2023 low of under 65.80 US cents Friday in US trading in the wake of the bank fears.
As a result it was financial stability, not monetary policy that dominated sentiment and will continue to rattle investors when trading resumes in Asia today, led by Australia.
The ASX 200 futures had a fall of around 40 points pencilled in for the resumption of dealings later today.
That will be a much (thankfully) smaller loss than the 2.3% slump that took investors by surprise on Friday.
Reuters reported at the weekend that vulture (read distressed debt) funds like Oaktree and investment bank, Jefferies were offering to buy the deposits of start-ups for as little as 60 to 70 cents in the dollar, as they try to capitalise on the desperation of the depositors ahead of the start of business on Monday.
SVB's stunning collapse and the move to close its UK arm rattled markets - US bank stocks lost more than $US100 billion in value late last week, Europe bank values fell by more than $US50 billion and Australian bank shares shed more than $A13 billion on Friday alone and will come under pressure again today.
A California regulator shut Silicon Valley Bank on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. SVB shares were halted on Friday after tumbling as much as 66% in premarket trading (after a 60% plus slump on Thursday).
That triggered more fears about other smaller, obscure banks with a fear list quickly assembled led by First Republic, a bank not too many investors had heard of.
A group of listed property trusts also were pinpointed by investors worried about the size of their bond holdings and possible unrealised losses, seeing SVB had reported a loss of $US1.8 billion when unrealised losses on its bond holdings were realised in a botched attempt to raise more money to try and save the bank.
The Fed’s rapid and large rate rises saw bond prices slump, triggering huge unrealised losses for holders that would not cause too much trouble, so long as they remained unrealised until maturity. That wasn’t the case at SVB, which was seen as odd given that Goldman Sachs was advising on the recap.
But there are also billions of dollars of fixed interest and floating rate notes coming due in the next few months that have suddenly lost value.
US commercial real estate could be a big worry for investors because there is more than $US60 billion in fixed rate loans that will soon require refinancing at higher interest rates.
Additionally, there is more than $US140 billion in floating rate commercial mortgage-backed securities that will mature in the next two years and which are showing unrealised losses.
Shares of office REIT companies like Alexandria Real Estate Equities, Boston Properties and Vornado Realty Trust all fell more than 5% on Friday. Shares of Boston Properties fell to its lowest level since 2009, while shares of Vornado hit its lowest level since 1996 - its shares were above $US92 back in 2025 and have been on a long slide for years.
If commercial property sees a growing impact, then the problem could become much wider and deeper for US markets.
There are already growing pressures in the trusts sector - in January Blackstone capped redemptions from its $US100 billion real estate income trust after investor withdrawals surged to $US5 billion which the fund could not handle without selling off properties at a loss.
That’s why the securities of property trusts are now on investor watch lists.
The failure went global when the Bank of England put the UK arm of SVB into what’s called resolution - or a form of administration on Friday and applied to wind up the subsidiary.
“SVB UK has a limited presence in the UK and no critical functions supporting the financial system. In the interim, the firm will stop making payments or accepting deposits,” the BoE said.
That was after the Financial Times reported that SVB’s British arm had sought 1.8 billion pounds (US2.16 billion) of liquidity from the BoE via its discount window facility, which offers emergency funding to banks if they have adequate collateral.
SVB’s collapse has already astonished financial markets with its speed and size - $US175 billion is a lot of money, no matter how many analysts say that it won’t have a big impact. Perhaps they are right - but all the same, fear and loathing are back and will hang around for a while yet.
Who will be next is now the question in markets as they prepare to re-open for another week, starting in Australia and Asia.