Weekly house view | Bank run
The Federal Deposit Insurance Corporation (FDIC)’s move to close Silicon Valley Bank (SVB) on Friday marked the first collapse of a US bank in 15 years. SVB, which was heavily concentrated on the tech industry, experienced a cash squeeze that exposed large unrealised losses on its long-term US Treasury holdings. The Fed’s aggressive rate hikes over the past year meant something was bound to break. For the moment, the US authorities seem to be prioritising financial stability. But inflation means the situation is different from the financial crisis of 2008. Central banks must choose whether to intervene to ensure short-term financial stability or tackle long-term inflation, but not both at the same time. We are positive precious metals and gold, which are clear beneficiaries of this dilemma and we note that buyers of distressed debt—a sector on which we are positive—are hovering. Last week’s events mean Fed chairman Jerome Powell’s unequivocally hawkish comments on rate policy must now be seen in a new light. The February consumer price index report tomorrow will be crucial for gauging market sentiment, especially as the Federal Reserve moves to raise rates again next week. The US jobs report for February showed the unemployment rate rising to 3.6% and wage growth moderating month on month, but growth of 311,000 in nonfarm payrolls means the labour market remains too tight for the Fed. As well as pushing US stock indexes lower, the SVB shock led to the largest daily fall in 2-year US Treasury yields in years. We are long US duration, underweight equities and underweight the US dollar.
Euro area GDP for Q4 was revised down to zero from 0.1%, but tentative signs of an economic rebound could be seen from in the 3.5% rise in German industrial production in January. This should provide extra room for the European Central Bank to raise its deposit rate by 50bps at this week's policy meeting. With Swiss inflation rising by a surprisingly high 3.4% in February, mostly due to domestic factors, we could see a similar rate increase from the Swiss National Bank.
In China, the National People’s Congress rubber-stamped Xi Jinping’s appointment as president foran unprecedented third term and announced a modest growth target of “around 5%” this year, which suggests some moderate fiscal support. All financial and economic decisions will be concentrated in the hands of a newly created centralised committee. Having nominated close allies in all key posts, Yi Gang’s surprise reappointment as central bank governor can be seen as a move to reassure markets at a time of many economic and financial challenges in China. More ominously, Xi's acceptance speech was quite aggressive, pointing to continued tensions with the US in the coming months. Of note, last week the US passed a law curbing foreign apps, including TikTok.