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Astute Market Overview - 14th March 2023


Hello, welcome to the latest Astute Market Overview. It’s a bit longer this week!

On Wednesday of this week, we’ll be watching the Spring Budget. We anticipate that there will plenty of announcements that could impact your financial plans from Jeremy Hunt, the Chancellor of the Exchequer. Hunt has been vocal on tackling economic inactivity, and we expect some notable changes to energy bills, pension lifetime and annual allowances, and childcare.

Whilst we can speculate over what we may see tomorrow, the proof is in the pudding, and so we will be back next week with an Astute Private Wealth breakdown of the budget.

Looking back to last week, Silicon Valley Bank (or SVB) first hit headlines towards the end of the week, and has remained the topic of conversation into this week.

SVB – a US bank – collapsed on Friday. The bank had a high level of business customers, specifically start-up and tech companies, who had a glut of money built up during the pandemic, held on deposit with the bank. In order to pay interest, banks typically use floating rate loans to get a higher interest rate return from the debtor to pay the deposit holder – the so called net interest margin.

As a business bank, SVB couldn’t write enough loans to match the deposits coming in and instead invested heavily in long-term government bonds, obtaining a fixed interest rate.

As interest rates increased, the value of those bonds fell, which, in and of itself, doesn’t create an issue if those bonds are held to maturity because they are matched to customer deposits. However, customers can take their money out and look for higher interest rates elsewhere. So ultimately SVB needed to sell some of the loss making holdings, either to fund withdrawals or just to somehow offer a higher rate of interest to prevent withdrawals.

The tech companies who typically bank with SVB were aware of this risk and so started to withdraw their holdings with the bank. This forces more bond sales and further losses, and compounds the problem.

What does this mean for markets? Financial markets hate uncertainty and get particularly worried about bank selloffs given the financial crash in 08/09, and so we have seen some market volatility around this. However, the current situation is far from the calamity of the financial crisis, and we don’t believe that the collapse of SVB is an indicator of the health of the banking industry. In fact, we think banks are in remarkably good financial health, and don’t believe that we’ll see any large scale contagion from this.

What leads us to that conclusion? Well firstly, there are so called “paper losses” on other bank balance sheets and that is what has worried markets, but the scale of those versus deposits is orders of magnitude smaller. Whilst there are always risks associated with a run on bank deposits, the levels of capital available to most other banks limits any systemic risk.

Secondly, we have seen a swift response to the bank’s collapse from the Federal Reserve, US Treasury, and US government, showing their appetite to protect customers, and nip any contagion issues in the bud. The UK arm of the bank was bought up for a nominal figure of £1 by HSBC.

And thirdly, SVB aren’t a typical bank; their fatal flaws are unique to them: a high level of business customers and high level of fixed rate securities (rather than floating rate loans).

Whilst the whole debacle is a warning to central banks and governments that you can’t turn up the interest rate heat too fast without the risk of getting burnt, ultimately we don’t believe there will be any further contagion.

As is always the case, the Astute Investment Management team actively monitor the markets and matters such as this, and should you need a further update, we’ll be here to provide it.

In other news, following some strong data released over the past few weeks, we had comments from Jay Powell, the chair of the Federal Reserve explaining that the Fed are prepared to reaccelerate the pace of interest rate decisions if the data points in the right direction. This led to a shift in market sentiment last week, regarding the pace of interest rate increases for the US.

Changing sentiment again, US non-farm payrolls data came in on Friday at 311,000, which was what we expected would be the news of week! This number was higher than broad economists’ forecasts, however a big step down from January’s monster number. The latest unemployment rate ticked up slightly to 3.6%, leading markets to believe that the interest rate increases could be leading to a slow down, as intended.

Whilst we often pore over data releases, we believe markets seem to have a short-term memory. When we take a step back from the market noise, and look at the bigger picture, we believe the long-term trend points towards disinflation in the US.

See you next time for a budget special.

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