Even though the actions taken to assist the banking sector were immediate and somewhat sufficient, the market began the session with a high degree of risk aversion.
US regulators decided to liquidate two banks, New York-based Signature Bank and Silicon Valley Bank, both of which were located in California.
The banking regulatory bodies and the American government immediately reacted to the events and announced several measures to boost confidence in the banking system. These actions are enabling customers to still obtain banking services and banks to access liquidity through discounted rates with more lenient terms. With this, banks that need liquidity to reorganise their balance sheets will be able to do so in the wake of aggressive interest rate increases and the subsequent decline in fixed income prices.
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Customers of Silicon Valley Bank and Signature will receive their money back, regardless of whether the deposit was covered by the deposit guarantee fund. Uninsured deposits could have had an impact on the economy, especially in the venture capital and start-up sectors, which Silicon Valley Bank served. This is why many small businesses that had deposits with the bank were greatly concerned over the weekend about whether they would be able to use their money.
Yet, even though the steps taken to remedy the issue can be viewed as being more than sufficient, the market began the session with a high degree of risk aversion. Investors began to sell bank and financial corporation shares, both in North America and Europe, out of concern that the crisis may spread or that other financial institutions may face similar issues.
In reality, this case cannot carry the same weight of systematic risk as that of the 2008 crisis, when many banks had toxic assets which were valued much higher than their market value on their balance sheets. This current scenario surfaced because of a specific liquidity problem, caused by an imbalance between assets and liabilities, and the quality of the assets in the investment portfolio this time is of the highest grade possible: US government bonds.
The Nasdaq index, which has the least exposure to the financial sector, closed in positive territory as the session’s stress subsided.
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The North American CPI statistic, which is set to be released today and is a crucial economic indicator, could become less relevant as the market is now betting on a pause in rate hikes due to the Signature Bank and Silicon Valley Bank crisis. Market interest rates reflect this as the current price of 10-year bonds is at 3.50%.
Because of the fall in interest rates and the weakening of the US dollar, gold is the asset that has benefited the most from this situation, surpassing the level of $1,900 per ounce and climbing its way to the highs of $1,957 per ounce from a technical standpoint.
Sources: Bloomberg, Reuters