Federal Reserve Boosts Liquidity to Ease Banking Crisis Fear

Banking crisis fears are rising and investors are bracing themselves for more fallout in the global banking sector after the last-minute rescues of Silicon Valley Bank (SVB) and Credit Suisse. The banks were on the verge of collapse before financial authorities intervened to find buyers willing to take on the risks of their giant portfolios of assets and liabilities.

Amongst other things, the banks were blindsided by eroding Treasury bill values, a record increase in interest rates, and cash outflows as their wealthiest clients pulled billions of US Dollars out of their accounts.

Will First Republic Bank be the next tree in the forest to spread fire in the global financial forest after its bonds were downgraded to junk?

As we saw in the 2007-2008 financial sector crash, the bigger the financial company fail, the more systemic the damage. The nature of such crises is to spread like wildfire because of multi-national links to other financial securities from mortgages to stocks and bonds. In the era of social media, the fires spread wider and faster than ever as investors watched SVB’s crash play out on Twitter.

Banking crisis fears spread to stocks

Wildfires are burning through financial stocks, weakening the S&P Financials sector in a sell-off, and pressure is likely to increase on the banking sector this week ahead of the Federal Reserve’s Interest Rate Decision on Wednesday. The central bank is expected to hike its key interest rate guidance to 5 percent from 4.75 percent previously, potentially adding to the risks in the banking sector.

Wednesday’s announcement will include the FOMC’s Economic Projections and interest rate projections, all of which will contain crucial information for investors concerned over their financial investments.

Financial authorities are scrambling to reassure investors and global central banks are acting to avert another crisis in the financial sector. To increase liquidity, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank have started a coordinated action to make US Dollar swap operations more efficient, clearing them daily instead of weekly.

“The capital and liquidity positions of the US banking system are strong and the US financial system is resilient.” Treasury Secretary Janet L. Yellen and Federal Reserve Board Chair Jerome H. Powell.

In other central bank news, the Bank of England (BoE) will announce its interest rate decision on Thursday, when it’s expected to raise its key guidance to 4.25 percent from 4 percent. The BoE’s decision will follow the latest update on the UK’s Core Inflation Rate, seen at 5.7 percent in February compared with 5.8 percent in the same period last year. On an annual basis, overall inflation is expected to have fallen to 9.9 percent in February from 10.1 percent.

Stock Market Moves

Technology stocks rebounded after sharp losses triggered by SVB’s crash, supported by developments and growth in the Artificial Intelligence industry. Chipmakers like NVIDIA and technology giants like Microsoft saw sharp gains at the beginning of the week.
The same can’t be said about banking stocks like Bank of America and JPMorgan, which remained under heavy pressure amid uncertainty in the global financial system.

Commodity Market Moves

Crude oil spot prices slumped as a weaker economic outlook was priced into demand expectations. Gold spot prices rose, however, reflecting safe-haven buying as investors seek firm ground amid the quicksand in the banking sector.

Disclaimer

The opinions expressed on this blog are for general informational purposes only. It is not a substitute for professional advice and should not be relied upon for investment decisions. It is recommended to seek professional advice from a qualified investment advisor before making any financial decisions. The views expressed are subject to change and past performance is not a guarantee of future results.

Research sources: Financial industry websites. Farmer’s Weekly. European Commission. Trading Economics. Federal Reserve website, CNBC market data.