Investors are continuing to err on the side of caution as they wait for the full ramifications of the SVB collapse to become clear. Our head of markets discusses latest events and the Federal Reserve's next move.
Bank shares globally continued to feel the reverberations from the fallout from the Silicon Valley Bank issue, with general sentiment weakening as a result.
US markets finished mixed to weaker, underpinned by a joint statement from authorities such as the Federal Reserve and the Treasury that SVB Financial Group (NASDAQ:SIVB) depositors could access their money, while a new programme to safeguard deposits would also be created. At the same time, the flight to safety resulted in higher bond prices and therefore lower yields, which lent some support to equities.
Within the equities space, there was also some buying of defensive stocks, while in the technology sector there was further support with the likes of Apple Inc (NASDAQ:AAPL) finishing higher. The fallout from the SVB collapse also led traders to question whether the Federal Reserve would reconsider its current interest rate hiking policy. Whereas the vast majority had been pricing in a further rise of 0.25% at the March meeting, there is now considered to be a 50% chance that the Fed will not raise rates at all.
However, the picture is far from clear and a couple of economic prints over the coming days could further complicate the Fed’s strategy. The imminent consumer price index reading is expected to show a rise of 6% in February, compared to 6.4% in January and 6.5% in December. Along with the retail sales number which is due on Wednesday, the Fed will need to consider the overall picture given both the nature of those two prints alongside the current jitters which SVB has introduced.
In the meantime, the main indices have given up most of the gains made from what had been a strong start to the year. Indeed, in the year to date, the Dow Jones is now down by 4%, the benchmark S&P500 has eked a gain of just 0.4%, while the Nasdaq remains ahead by 6.9%.
Asian markets unsurprisingly followed suit, with particular weakness being extended in banking shares. The sector was hit in both Singapore and Australia, but most markedly in Japan where systemic risk concerns weighed on what had been a relatively outperforming sector of late.
- Must read: market reaction as HSBC rescues Silicon Valley Bank's UK arm
- The simple maths that can make you an ISA millionaire
- ‘High risk? I don’t see it that way’: the investment secrets of an ISA millionaire
- 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes
UK markets also drifted in early trade, with banking shares continuing to slide, albeit at a slower pace. The declining sentiment has been enough to wipe out gains for the FTSE250, which is now broadly unchanged in the year to date, although the FTSE100 remains up by a modest 1.2%.
While it will take some days for the full ramifications to become clear, investors are once bitten, twice shy after the events of the Global Financial Crisis, when the full extent of the inter-connectedness of the banking world took some time to unravel into a generational shock. There is little to suggest a repeat at present, but in light of the investing backdrop and the possibility of other pressure points which are yet to emerge, investors are currently choosing to err on the side of caution.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.