Silicon Valley Bank Collapse Hits Wall Street

It was the worst week for U.S. stocks since September. Equity indices fell after Fed Chair Jerome Powell’s testimony on Tuesday. He cleared the way for larger interest rate hikes as the U.S. economy created 311,000 jobs last month, well above expectations (225,000). 

To make matters worse, stocks slumped again on Friday, amid fears of contagion that the collapse of Silvergate Capital Corp and SVB Financial Group could spread through banking stocks. Silicon Valley Bank which specialized in providing financial services to startups was closed by regulators. The Federal Deposit Insurance Corp (FDIC) has taken control of the bank via a new entity. This is the largest bank to fail since the 2008 crisis. Traders think this unexpected episode is the result of an economic slowdown and rapidly rising interest rates. Hence they are reassessing the outlook for additional Fed rate hikes.

The SVB rout triggered a sell-off in global markets, investors seeking out safer corporate bonds and government debt. The buying pressure on the U.S. 10-year and 2-year T-notes dragged their yields 26bps and 27bps lower respectively. 

The S&P 500 fell 4.55% week-over-week but remained above the flatline for the year (+0.58%). The Nasdaq Composite did not fare better (down 4.71% for the week, but still up 6.42% year-to-date). Small cap stocks were hit even harder (Russell 2000 down 8.07% for the week, +0.65% YTD).

It was also a sea of red across European stock markets with the MSCI EMU down 1.78% (+10.53% YTD). German inflation remained elevated. Consumer prices rose 0.8% in February. The ECB still has its work cut out to tame inflation in the Eurozone. The FTSE declined by 2.50% (+3.98% YTD).

In Asia, Japan’s Nikkei 225 index bucked the trend, up 0.78% (+7.85% YTD). Data showed that wage growth in the country fell more than expected in January. By contrast, the Shanghai composite lost 2.95% (up 4.56% YTD) after China’s new Foreign Minister Qin Gang warned Tuesday that “conflict and confrontation” with the United States seems inevitable if Washington does not change its rhetoric against his country.

Silicon Valley Bank’s shutdown spooks investors 

The SVB debacle is one of the fastest bank runs on record with deposit outflows of $42 billion in just 24 hours, sparking widespread fears of a spillover into the broader banking sector (domino effect). Regional banks like First Republic Bank (FRC, down 33% week-over-week) were under intense pressure as they have less diversified funding sources than their larger peers. The S&P financials sector took a nosedive (down 8.50%, worst performer this week). Yet it is unlikely that the sudden collapse of SVB can trigger systemic risk as the FIDC will protect uninsured depositors. Furthermore, the U.S. Treasury and the Federal Reserve have announced the Bank Term Funding Program (BTFP) that aimed at providing additional liquidity.

Against this gloomy backdrop, all the S&P sectors ended the week in negative territory for the first time this year, with the most defensive stocks outperforming the broad market (consumer staples down 1.92% and utilities down 2.88%).