Equity and fixed-income assets are in a downward spiral as traders digest and respond to news of the collapse of Silicon Valley Bank (SVB). In addition, there has been increased volatility in commodity markets, notably crude oil and precious metals. SVB specialised in catering to the financial needs of many tech start-ups. The company’s end came as a result of its heavy investment in longer-dated US bonds, which fell sharply towards the end of last week. Ultimately, this resulted in a rush of withdrawals from the bank, its liquidity crisis, and subsequent collapse.
As the sixteenth-largest bank in the US, the demise of SVB is arguably the greatest financial scare since the financial crisis in 2008, which itself ultimately trickled down to commodity markets. Indeed, the collapse last week impacted the oil market, with the Brent crude price tumbling on fears of a potential recession and slowdown in demand. In contrast, precious metals, such as gold and silver, surged as investors scrambled for exposure to these traditional ‘safe haven’ assets following the banking scare.
Although the Federal Reserve has stepped in with its Bank Term Funding Program, which makes it simpler for vulnerable institutions to borrow cash, the real question now is if the run on SVB can be contained by central banks, or if it will result in a domino effect of further banking disintegration and volatile commodity markets. Indeed, New York-based Signature Bank is the latest institution to be closed by regulators.
These market developments all came in advance of February Consumer Price Index (CPI) release in the US, which was 6.0%, down from 6.4% in January. When Federal Reserve Chairman Jerome Powell mentioned last week that “the ultimate level of interest rates is likely to be higher than previously anticipated,” traders thought it was highly likely that we would see a 50 basis point (bp) hike in March, more hawkish than the previous 25 bp hike at the beginning of February. Since the collapse of SVB, the softening of average hourly wage data, and a lower CPI, however, market sources have commented to Mintec that a 25 bp rise is now more likely. Some sources have even suggested there may be a pause in rate hikes.
While it remains to be seen if the run on SVB will spread to other institutions, the bank’s collapse will likely be a major talking point among central bank officials worldwide. Mintec will follow this rapidly developing story and provide updates on how it is impacting commodity markets in due course.
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