Written by Ilaria Massei.
Turmoil in the banking sector became the main focus over the last week, diverting attention from economic data releases for the first time in several months. A rapid outflow of customer deposits from Silicon Valley Bank (SVB) led to the biggest US bank failure since the global financial crisis. The Fed assured that all SVB depositors would have full access to funds on Monday morning and made additional funding available to banks to safeguard deposits and to address any potential liquidity pressures. This seemed to provide some confidence to markets that rebounded on Tuesday and coincided with the release of the annual inflation rate in the US which slowed to 6% in February from 6.4% in January.
However, on Wednesday, news broke that another banking giant, Credit Suisse, was experiencing problems and sent equity markets lower once again. In an environment, which is quite unlike 2008, where most European banks have strong capital cushions and are buying back stock, Credit Suisse was known to be more fragile. News that their core wealth management business was suffering major outflows led to a crisis of confidence and a rush of deposit withdrawals. The Swiss central bank stepped in with a £44bn credit line but the measure failed to stem the rush of withdrawals. Yesterday evening it was finally announced that UBS will take over the bank, trying to stop what could have triggered a global crisis of confidence in the banking sector.
Credit Suisse’s fall dragged down European Equities with the MSCI Europe Ex-UK and the FTSE All Share Index closing the week at -4.1% and -5.1% in GBP terms. On Thursday, the European Central Bank (ECB) raised interest rates by 0.50% to 3.0%, pressing ahead with its drive to combat elevated inflation. Policymakers also said that “the euro area banking sector is resilient, with strong capital and liquidity positions”, and that they were monitoring current market tensions closely. In the UK, the unemployment rate came out at 3.7 percent for the three months to January 2023, unchanged compared with the previous quarter. Total pay growth eased to 5.7% year-on-year in the three months to January from 6.0%.
Although banking stocks struggled, growth-oriented equities benefitted from a belief that the above may lead to a slowdown in the path of higher interest rates. In a flight to safety, bonds also performed much better with Barclays Global Aggregate Index up +1.4% for the week in GBP hedged terms. This reaffirms the benefit of maintaining an appropriately diversified portfolio by style and by asset class. We are also strong believers that taking a long-term investment perspective is the best way to navigate such uncertain and turbulent market conditions.