SVB Collapse Stops Big Fed Rate Hike Bets In Their Tracks, Hammers U.S. Stocks

Another hot jobs report should have consolidated bets on a 50 basis point Fed rate hike. Then came the SVB collapse.

U.S. stocks gave up nearly all of their gains for the year Friday, extending a weeklong slump of nearly 5%, following the collapse of SVB Financial  (SIVB) – Get Free Report, a California-based tech lender that’s shaken confidence in the domestic financial sector and sent investors fleeing from risk markets around the world. 

Silicon Valley Bank’s collapse, confirmed Friday by the effective takeover of its $209 billion in assets by the Federal Deposit Insurance Corporation (FDIC) at the behest of California regulators, could be one of the largest in U.S. history and the biggest since Washington Mutual in 2008.

SVB Financial shares, which plunged 60.4% yesterday — the most in two decades — were marked 45.5% lower in pre-market trading before being halted by Nasdaq officials prior to the opening bell.

SVB Stock Halted, Bank Shut Down Amid Multi-Billion Dollar Collapse, Shaking Bond-Laden US Financial Sector

A host of regional bank stocks were halted from trading after falling sharply in a volatile Friday session, including PacWest Bancorp  (PACW) – Get Free Report, First Republic Bank  (FRC) – Get Free Report, Signature Bank  (SBNY) – Get Free Report and Western Alliance Bancorp  (WALPL) , and Treasury Secretary Janet Yellen met with both Federal Reserve and FDIC officials to assess the collapse and its impact on the banking system.

The S&P 500‘s regional bank index, in fact, is down around 19% so far this week, its worst five-day slump since 2009, while the benchmark S&P 500 Banks Group index has fallen nearly 7% over the past two sessions.

“SVB Financial Group’s struggles show the dangers of doing business with bad companies,” said David Trainer, CEO of Nashville-based investment research group New Constructs. “Many tech startups are actually zombie companies with no business models and aren’t worthy of receiving any kind of loan. SVB is now learning this the hard way.”

“We do not believe there is contagion risk for the rest of the banking sector on the heels of SVB’s struggles,” he added. “The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health.”

Contagion risk, however, is still being reflected in the CBOE Group’s key benchmark volatility index, which surged 5.5% to a five-month high of 28.08 points on Friday as markets attempted to unravel both the root causes of the SVB collapse and its impact on both U.S. and global markets.

The spillover effects in other markets were also evident, with benchmark Treasury bond yields falling sharply lower as investors piled into safe-haven assets even in the face of a stronger-than-expected February jobs report that could stoke further inflation concerns in the world’s biggest economy. 

Benchmark 10-year Treasury note yields fell 21 basis points from yesterday’s levels to 3.699% while 2-year notes fell another 27 basis points to 4.609%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.68% lower at 104.598.

U.S. stocks were also extending their recent slump, with the Dow Jones Industrial Average tumbling 255 points by late afternoon trading and the S&P 500 falling 45 points to come withing around 0.6% of erasing its entire gain for the year. 

Forget The Fed: Stocks Will Slump Even If Jerome Powell Slays Inflation Beast

The moves may also reflect speculation that the Federal Reserve could be forced to slow, or even pause, the pace of its near-term rate hikes in order to prevent other banks from suffering similar stresses to the ones that lead to SVB’s failure. 

SVB attempted to raise around $2.25 billion in new equity in order to shore-up a $1.8 billion hole in its balance sheet caused, in part, by losses in a $21 billion Treasury bond portfolio.

The group also noted an eroding deposit base, given the marked slowdown in venture capital markets, as well as ongoing pressure on its profit margins linked to the impact of relentless central bank rate increases. 

The outflow was exacerbated by losses in the Treasury portfolio, which has been declining in value for much of the year as the Fed Funds rate surged from around 0% last year to its current rate of 4.5%.

In a blogpost published last month, just as Treasury yields began to climb following hotter-than-expected inflation data and the blowout January jobs report, Carl White, a  senior vice president for supervision at the St. Louis Fed, warned that while rising rates could support margins on bank loan books, “but they also could increase the cost of liabilities and decrease the value of investment securities held as assets.”

White put the value of high-rated bond holdings — mostly mortgage-backed securities and Treasuries — at around 25% of bank-sector assets.

That view is being expressed, at least in party by the CME Group’s FedWatch, which now suggests a 39.5% chance of a 50 basis point rate hike from the Fed later this month in Washington, down from around 80% earlier this week when Chairman Jerome Powell warned of ‘higher for longer’ rates in order to fight stubbornly high inflation. 

Powell’s warning could have been amplified by Friday’s February jobs report, which showed U.S. employers added a bigger-than-expected total of 311,000 new jobs to the economy last month, with year-on-year wage growth quickening to 4.6%.

“Had someone told you last Friday that this week would bring a fire-breathing testimony from Jay Powell and a hefty 311,000 February payroll advance, your natural response probably would not have been to buy bonds,” said BMO’s chief economist Doug Porter. “But, as it happens, that would have been precisely the correct response as the troubles as SVB have overshadowed other fundamental factors.”

As a result, the odds of an extended Fed tightening cycle have eased, with bets on a terminal Fed Funds rate that rises past 5.5% falling to just 20%, compared to around 75% earlier this week.

“There’s receding probability that more hikes are coming but for the wrong reason: recession fears and implications from what’s happening in the banking space,” said Gina Bolvin, president of Boston-based Bolvin Wealth Management Group. 

“We think the SVB situation is specific to them (although) other regional banks might be affected,” she added. “Big banks are in a different situation because they have enormous capital, are much more diversified and are more recession-resistant.”

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