Sharemarkets subdued amid activity
Is this the beginning a 2007-08-style credit crunch?
Over the last 10 days, we’ve seen some of the biggest moves across financial markets in decades. Much of this has been in fixed income and bond markets, rather than in shares.
On the Monday before last, the US two-year Treasury yield fell by 32 basis points, which is the biggest oneday fall since the 9/11 attacks of 2001.
In contrast, sharemarkets have been remarkably subdued. In the week after the Silicon Valley Bank news broke, the S&P 500 in the US was up slightly. The VIX index, which reflects volatility in this index, didn’t get to the levels we saw last year.
Ironically, the banking crisis we’ve seen play out on both sides of the Atlantic could be a positive for shares, at least in part.
A key reason for this is that the events of the last fortnight could slow economic activity a little, helping central banks in their inflation fight and reducing the need for further interest rate hikes.
Bank funding costs could increase on the back of this, while lending standards could rise. This has historically been a reliable leading indicator for credit growth, which has a big impact on economic growth overall.
Lending standards have been tightening anyway, and the events we’ve seen this month could intensify this trend.
That doesn’t mean the inflation problem will immediately go away, but a sharper decline in activity would speed that process up too.
If this bout of risk aversion does indeed assist the world’s central banks, we might see a slightly lower path higher for interest rates in the months ahead.
Three weeks ago, financial markets were picking three or four more rate hikes to come in the US this year, but today they believe the Federal Reserve is close to done.
It could be a similar story for our own Reserve Bank, which meets the week after next. While another small hike in the Official Cash Rate is likely, we might be closer to a pause than
we think.
A key question many are asking is whether the events of the past fortnight are the beginnings of a 2007-08-style credit crunch, or if they’re merely a symptom of the dramatic rise in interest rates.
Silicon Valley Bank was highly concentrated in the tech start-up sector, while Signature Bank had waded into crypto. Both had taken on too much interest rate risk, while Credit Suisse has been plagued by mismanagement for years.
Then-us president Donald
Trump’s 2018 rollback of some Gfcera regulations might’ve also been a factor. Designed to free up smaller US banks from the tougher rules their largest counterparts faced, this might’ve also led to riskier behaviour.
New Zealand is quite different, and we needn’t worry about the health of the big four Australian banks or Kiwibank (which is still Governmentowned).
Our regulatory environment is robust, the banks have all been required to hold more capital in recent years, while the liquidity and funding backdrop has improved since the GFC days.
Even if this isn’t a repeat of 2008, I doubt that SVB and Credit Suisse will be the last casualties of the sharp tightening in monetary policy.
In the mid-1990s it was the Mexican crisis, in the early 2000s it was the bursting of the dot-com bubble, and in 2007 it was the US housing market. This time, it’s been a few crypto operators and some banks that have taken on too much risk. So far, that is.