Tuesday Morning Update

SVB

Headlines continue to be dominated by the fall out of the collapse of SVB as authorities try to mitigate against contagion. As news continues to circulate, a risk-off move has permeated through global financial markets with share prices in banks sliding.

For example, Asian banking shares have taken a hit this morning as market confidence continues to slip in the wake of SVB’s collapse. The risk-off move has for example seen Japan’s Topix Banks index slip close to 8% during today’s session - the largest fall in more than three years. Within this, Mitsubishi UFJ Financial Group’s shares – the country's largest lender – fell over 8% today.

This comes as the Japanese Topix fell over 3% per cent, indicative of the wider impact that SVB’s failure has had on market sentiment. In an attempt to restore confidence, yesterday the BOJ intervened by purchasing $5.2bn worth of exchange traded funds, the first move of its kind since December. Across the Sea of Japan, South Korea’s Kospi has fallen 1.9% while Hong Kong’s Hang Seng and China’s CSI 300 fell 1.8% and 0.8%, respectively.

Biden Attempts to Reassure Markets

Yesterday, President Joe Biden again tried to restore confidence in the banking sector and financial markets more generally. Following the failure of the second largest bank in US history, Biden stated that his administration will do ‘whatever is needed’ to ensure that depositors would be able to access their funds. Biden also stated that the costs incurred would be met by the fees that regulators charge to banks, and not come from tax payers.

Notwithstanding Biden’s attempts to reassure markets, shares in many US banks saw a heavy fall yesterday. For example, First Republic Bank slumped 61.8%, while Western Alliance Bancorp and KeyCorp lost 47.1% and 27.3%, respectively.

Treasury Yields Decline As Investors Weigh on Fed's Next Move

As investors recalibrate their rate hike expectations form the Fed at their meeting on 22nd March, treasury yields on US notes fell sharply yesterday. While markets had been weighing on the prospect of a 50bpt hike to bring the base rate from 4.75% to 5.25%, questions are circulating on whether the central bank will raise at all. For example, over the weekend Goldman analysts stated that they did not expect the Fed to raise rates next week while they also reduced their terminal rate expectations to 5.25%-5.5%, against a general market consensus of 5.6% last week.

Accordingly, as investors downwardly revised their rate hike expectations, yields on the US 2-year saw a decline of 0.62 percentage points yesterday, marking the biggest single-day drop since 1987. This comes as the 2-year saw the highest monthly rise since 1981 over February as it rose 70bpts and breached its highest level since 2007 in early March.

UK Labour Market In Focus

This morning has seen UK unemployment come in at 3.7% marginally lower than expectations with the number of unemployed people rising by just 5,000 for the three-month period up to January. This came as the labour participation level increased by 65,000 people, driven by a return of workers who had exited the labour market during the so called ‘Great Resignation’ and

Average earnings fell for the first time in a year, suggesting that some of the heat was easing from the UK labour market. For example, wage growth excluding bonuses came 0.1 percentage points below expectations, hitting 6.5% on an annualised basis for the three-month period up to January. This comes following last month’s print which marked the biggest rise in wages since records began in 2001 (excluding the recent pandemic-caused peak). Nevertheless, with headline inflation continuing to be in double digits, when adjusted for inflation, regular pay fell 2.5% as household budgets continue to get stretched.

The UK labour market continues to be tight with historically low levels of unemployment and high job vacancies. Nevertheless, during Q4 2022, the Bank of England’s warned that unemployment could rise to 6.5% over the next few years as the UK economy enters what could be its longest recession in a century, though these recessionary fears have eased. A recent study also suggested that there was a worker shortfall of 330,000 due to Brexit related restrictions, highlighting structural concerns to the UK labour market.

Additionally, when looking at the divide between the public and private sector, while the former saw wage growth of 4.8%, the latter experienced 7%. Hence, with UK labour market in focus, all eyes are now on Hunt's budget ahead of the BoE's rate decision on 23rd March.