- Multi-Asset Strategist
- About Us
- My Account
Explore our insights
Media & press
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As of 14 March 2023
The -9.8% US regional banking sector sell-off at time of writing is one of the largest one-day negative returns in the history of the KWB Nasdaq Bank index. The sell-off that started last Friday comes at a time when consensus expectations had begun to favour the probability of the US Federal Reserve (Fed) engineering a soft landing, based on leading indicators of economic activity, consumer sentiment, rebounding manufacturing new orders and potential signs that the US housing market was starting to bottom out.
But it appears that the markets now see banking stress impacting the Fed’s inflation-fighting strategy, as evidenced by significant downward moves in interest rates, which have dropped in recent days (by 41 basis points for 10-year paper and 99 basis points for two-year paper, respectively, from the end of day on March 8 to the time of writing). This suggests that markets expect the Fed to be increasingly concerned about financial instability, perhaps even more so than the inflation worries that have been at the centre of the central bank’s attention for the past year-plus.
It's worth noting that the global backdrop has been more resilient to the regime shift towards higher interest rates and higher inflation than we had expected, and equity markets have largely taken these moves in their stride. However, we also recognise that inflation is uncomfortably high for central banks. In this environment of sticky inflation, where central bank terminal rates are being repriced, we believe that corporate earnings and multiples, as well as credit spreads, remain vulnerable.
The impact of policy tightening is making its way through the system, although the long tail of historical liquidity has meant that both the timing and magnitude of the impact is less predictable than it’s been in the past. This suggests more room for policy error and liquidity-induced accidents like the Silicon Valley Bank Financial Group (SVB) crisis. The history of financial markets suggests that policy tightening regimes often have unanticipated knock-on effects, like the collapse of two Bear Stearns hedge funds in 2007.
Key areas impacted by tightening financial conditions include:
Regarding the banking system, the Fed’s rate hikes have prompted an inversion of the yield curve, which reduces net interest margins and profitability, and, over time, leads banks to tighten lending. In addition, the Fed has let its balance sheet passively run off to the tune of roughly US$95 billion per month while also draining its liabilities, including bank reserves, amid its cycle of quantitative tightening. Taken together, this can have a nonlinear impact on banks’ liquidity past a certain point through funding markets.
Right now, it's still unknown if SVB’s fate will pose serious contagion risk or have systemic impacts. The Federal Deposit Insurance Corporation (FDIC) and state regulator have stepped in to protect depositors while the Fed has announced a new lending facility, but further regulatory ramifications are unclear. From a macro perspective, this event emphasises that the typical transmission mechanism from central bank tightening through the financial system (and, eventually, the real economy) is likely still intact and is likely to accelerate. We will be closely watching market volatility and policy reactions in the US and other markets for further cues.
While the US is at the epicentre of the stress, developed markets outside the US are affected due to their higher-beta nature and because any US liquidity tightening will impact global growth. However, there are clearly different dynamics in play from region to region and we expect these to be taken on board by investors over time. For example, China seems largely insulated from recent US events as its economy benefits from reopening, with other Asian regions benefiting as well. While the market has also pared back rate expectations in the eurozone, the European Central Bank will face a tough balancing act between the need to support financial stability and the continued uphill struggle against core inflation pressures.
At this early stage, it is difficult to map potential outcomes. We think investors should closely monitor developments and the potential risks for portfolios. Ultimately, decisive US policy action and the market slide — which is helping to address the problem by bringing down yields and therefore the extent of unrealised losses — may lead to stabilisation and opportunity, but it is too early to tell. For now, we would advocate a more defensive portfolio positioning.
Wellington investor survey: The bears ponder whether inflation will be too hot, too cold or just rightContinue reading
On to the next crisis: Glimpsing a post-SVB worldContinue reading
Understanding the US banking sector shake-upContinue reading
Tight money: Banks feeling the squeeze of higher ratesContinue reading
Decoding the effects of deglobalizationContinue reading
Stay up to date with the latest market insights and our point of view.
Wellington investor survey: The bears ponder whether inflation will be too hot, too cold or just right
Conducted prior to the collapse of Silicon Valley Bank, our latest quarterly survey of Wellington investors shows a majority of respondents being more bearish than the consensus view.
On to the next crisis: Glimpsing a post-SVB world
Amid the turmoil in the US banking sector, Global Investment Strategist Nanette Abuhoff Jacobson suggests investors consider pivoting to a “risk-management mode” that favors higher-quality assets. (Published 14 March 2023)
Understanding the US banking sector shake-up
Investment Communications Managers Jitu Naidu and Adam Norman detail recent US bank failures and analyze the implications. (Published 14 March 2023)
Tight money: Banks feeling the squeeze of higher rates
In this curated collection, some of our experts share their latest perspectives on the ongoing turmoil in the US banking sector and its potential implications.
Decoding the effects of deglobalization
Nicholas Petrucelli outlines the economic, political, and geopolitical underpinnings of deglobalization. He also demonstrates the impact this trend has today and analyzes the investment implications.
New BOJ governor: Dove, hawk… or owl?
Investment Director Masahiko Loo and Client Portfolio Manager Jitu Naidu discuss potential implications of the upcoming “changing of the guard” at the BOJ.
Fixed income 2023: Ripe for a reversal
Three of our fixed income investment professionals discuss the potentially compelling opportunity set to be found in today's global bond markets.
US debt-ceiling risk: Justifiable jitters?
With markets on high alert around the US debt-ceiling standoff, Macro Strategist Juhi Dhawan lays out some possible paths forward and weighs the economic risks.
More currency volatility ahead: Which hedges could help?
To help investors begin to think about elevated currency risk, as well as opportunities to generate alpha through active currency management, members of our iStrat Team offer an overview of hedging approaches and their potential tradeoffs.
Sector rotation opportunities for nimble credit investors
Following a credit market rally, Fixed Income Portfolio Manager Rob Burn still sees value in higher-yielding sectors but believes investors should stay nimble.
Russia/Ukraine: One year in with no end in sight
Geopolitical Strategist Thomas Mucha analyzes the impacts of the Russia/Ukraine conflict one year in and identifies potential longer-term effects.