Roll forward to the Ides of March and volatility is back in a big way as the sudden collapse of two West Coast banks, the regulators apparently dozing at the wheel, have sent shock waves through the banks.

Late last year, Jerome Powell, Chairman of the US Federal Reserve, said that he wanted to “bring some pain” before raising rates twice more.  He has achieved his objective in the bank sector, which in itself will serve to tighten credit conditions further.  All eyes now on next week’s Federal Reserve meeting, expectations have ranged widely, having been out to a three-quarter point move earlier in the month they are now for a quarter-point move at worst.  As an aside, it is extraordinary to observe that the demise of Silicon Valley Bank appears to have essentially been a classic case of ‘borrowing short and lending long’ – how very old-fashioned.  They were funding with wholesale deposits (v mobile these days) and investing in dated US Treasuries, which sank with the jump in bond yields.  What were the regulators doing? Surely they have measures/rules for this, they certainly do over here.

As of today, world markets are just about hanging on to some gains for the year.  In America, the S&P 500 is up 2% while the NASDAQ is up by 9%.  European markets are still ahead for the year following good performance from the French and German markets while London stocks are flat for the year having been solid until the past week.

The damage has been most evident in the banks (and other financials) over the past week.  Putting aside the smaller US regional banks, which have really suffered, the past two weeks have seen big falls in the majors too: Bank of America down 16%, Citigroup by 8%, even JP Morgan down by 5.5%.  How logical this is remains to be seen, Bank of America has already reported an increase of $15bn in deposits since the demise of SVB.  In Europe, Banco Santander, Deutsche Bank, Société Générale, are all down mid-teens percent and, once again, Credit Suisse is leading the decliners with a 38% fall after further revelations.  The UK leaders have seen a 14% fall for HSBC, 17% for Standard Chartered and 19% for Barclays.

The gloom is also spreading to the oil majors and the miners with BP, Repsol, Shell and TotalEnergies all down 8% or so over the past week, in line with a falling oil price, Anglo American and Glencore are leading the declines in the miners.  The industrials are also struggling with notable recent falls for Caterpillar, 3M Co and Saint Gobain.

The positive performance has mostly come from the technology stocks led by a huge jump in Meta Platforms, which is continuing to rationalise its business aggressively, Apple has had a strong year to date (up 17%) as have Alphabet, Amazon.com and Microsoft.  The consumer discretionary companies have also had a good time of it (though this is fading at the moment), the car companies have done well, notably Mercedes-Benz, Nissan and Porsche while the luxury goods companies saw further gains for LVMH.

It is unwise to fight against the market in such a mood as it is today, but it certainly does have the whiff of panic about it and we must certainly be looking for opportunities as babies get thrown out with the bath water.  Until the past week, all the focus was on inflation and the likely trajectory of rates, but this is now taking a back seat to a perceived bank crisis.  We do not think that this is a credit event for the banking system as a whole and certainly not for the majors, we expect that this will be revealed to be a specific problem for SVB.  Inflation is still the key and this week’s events serve to do a part of the central banks jobs for them as credit conditions will, undoubtedly, tighten as a result.  In turn this should mean that the ‘terminal rate’, that everyone was worrying about until recently, can be lower.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.