- Sea of red on indices as worries whip around after banking rout.
- Interest rate expectations in the US dip back as Fed is expected to focus on financial stability
- Oil price falls below $80 as worries rise about impact on global growth
- UK labour market shows some easing, but Bank of England may still go for 0.25% hike
- Gold hovers above $1900 holding onto gains amid a search for safe havens
- Drinks companies bracing for sharp increase in alcohol duty
Q4 2022 hedge fund letters, conferences and more
A Sea Of Red Descends
A sea of red has descended on indices as banking stocks continue to be sideswiped in the wake of SVB Financial Group (NASDAQ:SIVB)’s collapse and worries reverberate about the tech sector’s fragility.
Those niggling concerns that mild recessions could be on the way have been replaced by a wall of worry about runs on smaller banks like First Republic, and the risk that larger institutions may turn more risk averse to lending amid this volatility, prompting deeper downturns.
The feared knock-on effect for the global economy is showing up in a falling oil price. Brent crude futures have dropped below $80 a barrel, to a level not seen since early February. Gold prices, considered to be a hedge against economic uncertainty, is holding above $1900 an ounce, after jumping 2% on Monday.
Interest Rate Expectations Dip Back
The bond markets have whipsawed in reaction to the banking sell-off, with the market now expecting that the Federal Reserve will be forced into go-slow on further rate hikes or even press pause this month, to restore financial stability.
US Treasuries have shot up, and yields have fallen back, although they have crept up ever so slightly as some speculation grows that Jerome Powell won’t want to completely back-track from his intention to keep cooling down inflation.
The CPI figures out later will be watched super-closely as another hot reading will reinforce expectations that a rate rise, albeit smaller, will be on the cards next week.
BoE Will Be Keeping An Eye On The Global Banking Rout
The Bank of England will be keeping one eye trained on the global banking rout and another trained on the latest UK labour data showing a slight cooling off in wage inflation and an increase in vacancies.
The labour market is edging in the right direction and loosening up, indicating interest rate hikes are having an impact on demand. But it might not be quite enough to assuage inflation concerns, so the Bank of England’s monetary policy committee may still vote for another 0.25% rate hike this month.
However, any further intensifying of the banking sell-off and a fresh deterioration in the global economic outlook this week could see more policymakers vote to keep rates on hold.
The expectation that the hiking cycle won’t now go quite so high in the US did help the broader S&P index, which closed only marginally lower, but losses became entrenched during trading in Asia, with the fear factor spreading.
Although immediate financial lifelines for tech start-ups around the world have been maintained, attention is now turning to how they will be able to secure fresh funding for the longer term, particularly with venture capital drying up and investors reeling from the SVB shock.
Attention will be trained later on European banks, which were battered by worries about malaise spreading. Although the deposit backstops from US regulators have quelled fears of wide contagion in the financial sector, eye-watering falls in the share prices of smaller regional banks demonstrates the loss of shareholder confidence.
Bigger banks are sitting on big unrealised losses in their bond portfolios, although they’re still considered unlikely to be forced to liquidate their bond holdings due to their stable deposit holdings, and greater capital buffers.
The expectation is that banks will have to work a lot harder to attract customers, given this turn of events, to stop them pulling their bank deposits to put money in other assets with a higher rate of return like short term government bonds.
They will need to retain deposits and attract more capital in, and this is set to have an impact on their net interest margins at a time when confidence is already being sideswiped.
Another Unpalatable Development For Drinks Companies
At a time when the drinks and hospitality industry has had to deal with painful inflation, amid higher energy costs and wage increases, estimates that an even sharper rise in duty on alcohol could be on the way is another unpalatable development.
With the bell set to be run on the duty freeze, a hike of 10% was expected but now it’s rumoured that Jeremy Hunt may increase duty by the higher RPI level of inflation. Already companies were bracing for steep rises due to a shake-up in the alcohol duties in the summer, with stronger drinks like wine and port taxed more.
Analysis from the wine and spirit trade association shows a bottle of plonk will be at least 44p more expensive from August.
It’ll leave a bitter taste for wine suppliers and drinks makers like Diageo plc (LON:DGE). It would round off a particularly turbulent week for Naked Wines PLC (LON:WINE), which banked with the collapsed SVB and at the weekend was facing an existential crisis until HSBC snapped up the UK arm.”
Article by Susannah Streeter, head of money and markets, Hargreaves Lansdown