They are calling it the SVB factor and it’s likely to put the local market on the back foot today. It’s also a public holiday in Melbourne, which generally points to a quiet trading day.
ASX futures were down 0.6% to 7,109 this morning.
Before we look at the fallout of the Sillicon Valley Bank (SVB) collapse, let’s recap the markets.
A positive day that didn’t come
The US was looking to have a day out on Friday, fuelled by a hot jobs report.
US non-farm payrolls added 311,000 jobs, beating consensus expectations of 224,000 jobs. The unemployment rate ticked up to 3.6% due to an increase in the participation rate (those looking for jobs), the forecast was for no change at 3.4%.
Instead of reacting to the jobs report, Wall St hit the red as the collapse of the SVB sent shockwaves through the markets.
Here’s what we saw (source Commsec):
- The KBW regional banking index fell by 2.4% while the S&P 500 financials index lost 1.8% and the banks index fell 0.5%. Regional banks fell most.
- The Dow Jones index lost 345 points or 1.1%.
- The S&P 500 index slid 1.5%.
- The Nasdaq index shed 199 points or 1.8%.
- Over the week the Dow Jones lost 4.4%; the S&P 500 lost 4.6%; and the Nasdaq lost 4.7%.
- The Euro rose from US$1.0572 to US$1.0700 and was near US$1.0645 at the US close.
- The Aussie dollar rose from US65.74 cents to US66.37 cents and was near US65.75 cents at the US close.
- The Japanese yen rose from 137 yen per US dollar to JPY134.15 and was near JPY135 at the US close.
- Global oil prices rose on Friday with investors encouraged by the lift in US jobs in February.
- The Brent crude oil price rose by US$1.19 or 1.5% to US$82.78 a barrel.
- The US Nymex crude oil price lifted by US96 cents or 1.3% to US$76.68 a barrel. Over the week Brent fell 3.6% and Nymex fell 3.8%.
- Base metal prices were lower on Friday, falling by up to 2.5%. The copper futures price fell by 0.2%. The aluminium futures price dropped 0.6% to two-month lows on fears about metal demand. Over the week metals fell by as much as 7.8%.
- The gold futures price rose by US$32.60 or 1.8% to US$1,867.20 an ounce.
- Spot gold was trading near US$1,868 an ounce at the US close. Over the week gold rose by US$12.60 or 0.7%.
- Iron ore futures fell by US4 cents to US$129.44 a tonne. Over the week, iron ore rose by US$2.80 or 2.2%.
The SVB collapse
Australia won’t be immune to the collapse of the United States’ second-biggest bank.
On Thursday morning AEST time, the SVB made an unexpected filing to the US Securities and Exchange Commission (SEC).
The regional institution with a primary focus on California tech, told the regulator it was selling close to $32 billion in assets and a huge amount to stock to balance its books.
The problem for the SVB was the assets weren’t set to mature for a long time: it meant they sold at a time of high interest rates and low valuations.
Not a good combination.
Especially when illiquid assets are facing further interest rate hikes of up to 6%.
The news of the sale caused a run on the bank, sending SVB into bankruptcy.
The US banking regulator took over and a receiver was appointed. The collapse marked the second biggest ban collapse in modern US history.
Now for the fallout.
The CEO of the SVB reportedly sold million in stock just days before the collapse, while start-up and VCs will likely find it difficult to get their money back.
Emergency measures have now been put in place by regulators.
A joint statement on Sunday night from Treasury secretary Janet Yellen, Federal Reserve chair Jerome Powell and Federal Deposit Insurance Corp. chair Martin Gruenberg said that depositors at SVB would have access to all of their money on Monday.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the president, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, Calif., in a manner that fully protects all depositors,” they said.
“Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
Additional funding will be made by the fed to ensure depositors have access to funds.
Here’s how it played out: SVB closed until Monday by US regulators as concerns mount over uninsured deposits
SVB and the local markets
This is a "heartbreaking day" day said Silicon Valley Bank's Australia and New Zealand director of partnerships Sarah Rona.
"A heartbreaking day. Thank you to everyone who has called, messaged, texted, etc. It means the world to have such a global community around me," Rona said in a LinkedIn post.
"#SVB has changed my career- I really found myself here and found a job I loved to my core.
"I’m incredibly aware of how this has impacted SVB’s clients – my clients and I don’t take that lightly.
"While I’m unsure what the future holds- like all my colleagues and the startup ecosystem alike, hoping for a positive outcome.”
There is a fait amount of Australian exposure, with the country’s largest venture capital firms Blackbird, AirTree, Square (NYSE:SQ) Peg and Folklore confirming their exposure.
Life360 said its exposure "may be" between zero and $5.6 million.
The Tech Council of Australia (TCA) is also assessing the damage of what some have called an “extinction level event” for some tech companies.
TCA chief executive Kate Pounder said, "We're encouraging anyone in the local ecosystem impacted by the situation to get in touch with the Tech Council or the AIC to help coordinate an assessment of the impact.
"Our preliminary sense is that the majority of local Australian firms are not directly impacted, although we are aware of some who have been, and we want to work with them to support them."
The TCA is now working with government and the Australian Investment Council to assess the impact.
Could rate hikes now pause after the collapse?
According to Betashares (ASX:BBUS) Chief Economist David Bassanese the collapse of the SCB could force central banks to yield on further rate hikes.
Noting a regulatory concession to smaller banks with regard to mark to market paper losses on fixed rate assets Bassanese said, "Perhaps given this concession, it also did not feel the need to hedge against the risk of these paper losses in the first place. So, when an initial fall in deposits forced it to sell some assets and realise some losses, others got spooked and a classic bank run followed.
"How many other smaller banks are sitting on major paper losses and so are also vulnerable to a non-insured depositor run?
"Now that the genie is out of the bottle, my sense is this won’t be cleared up quickly – meaning the Fed may need to pass on raising rates again at the next meeting. Depending on the fallout in the next few days, moreover, the mayhem will likely be enough to encourage the RBA to pause at the April meeting also.
"While any respite from Fed rate hikes will be good news, the lingering fear of financial contagion and a collapse in credit may more than offset this."