SVB Failure

Last week, the SVB Financial Group announced a share sale to raise capital to plug an $1.8 billion hole created by the sale of a loss-making securities-portfolio ^[1]. This sparked a plunge to the Group's stock and a run on Silicon Valley Bank (SVB). According to a regulatory filing, investors and depositors withdrew $42 billion in deposits on March 9, leading to a negative cash balance of approximately $958 million, as of the that day's close of business. ^[2]

The California Department of Financial Protection and Innovation stepped in on Friday and closed the Silicon Valley Bank, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver. According to the press release, all insured depositors "will have full access to their insured deposits no later than Monday morning", while uninsured depositors will get an advance dividend within the week. ^[3]

Financial Ramifications

Speaking on CBS's Face the Nation on Sunday, Treasury Secretary Yellen did not show any inclination of a bailout for the failed bank and emphasized that the banking system is "really safe and well-capitalized, it's resilient". ^[4]

The regulatory action to insure deposits and Ms Yellen's comments seem to assuage fears for a spillover to the banking sector and the financial industry. However, it is still early on to assess that impact and authorities closed another bank over the weekend – the Signature Bank of New York. ^[5]

Even if worse developments are averted, the shutdown of SVB could still have a significant impact on Silicon Valley. The bank did business mostly with tech start-ups and its closure could increase cost of lending, in a sector that has already suffered from the high interest rates.

Fed Policy Implications

During his Congress hearing at the first half of last week, Fed Chair Powell appeared more aggressive than his previous speeches and opened the door to an acceleration to the pace of tightening if warranted by the incoming data, after a series of higher than expected economic indicators. ^[6]

This had reinforced the Fed's higher-for-longer prospects, heightening market expectations, which moved to price in a bigger 50 basis points hike in the upcoming and a higher terminal rate. Then came the collapse of SVB, which will likely restrain the Fed's hawkishness. Furthermore, Friday's jobs report - although overall strong - showed that unemployment ticked down to 3.4% and wages eased on a monthly basis.

These developments led to another repricing to the Fed's policy path, this time to the downside. At the time of writing, CME's FedWatch Tool assigns the highest probability to a 0.25% hike in the upcoming meeting (from 0.5% previously) and to a terminal rate of just 5.25%.^[7]

NAS100 Analysis

After the initial negative reaction to the SVB news, NAS100 rises as markets now expect a less aggressive policy path by the Federal Reserve. However, there is a very uncertain background amidst the Fed's communication blackout period, as there is always risk of spillover, even if this does not appear like the most likely scenario for now.

Furthermore, US CPI inflation is due on Tuesday, after last month hotter than expected report. The figures will be taken into account by policy makers and could spur volatility and determine the movement of the stock market.

NAS100 rises today and this may give it the opportunity to push back towards 12.450-70, but current themes may not be able to carry it much further, towards and beyond 12,900. The index struggles around the EMA200 and it is in risk of lower lows towards mid-11,000s although strong catalyst would be required for sustained weakness below that level.