The easy-cash era is over, and its effects are only just beginning to be felt by world markets, with the fastest interest rate hiking cycle in decades yet to see an end.
The risks were brought to the fore this week as US tech experts Silicon Valley Bank was closed On Friday by California banking regulators, bank stocks spark. SVB was seeking the funds to offset the hit on its $21 billion bond portfolio as customers withdrew deposits.
Meanwhile, central banks are shrinking their balance sheets by offloading bond holdings as part of their fight against runaway inflation.
We look at some potential pressure points.
banks
Banks have shot up the concern list svb Bank stocks tumble globally on contagion fears. European banks fell on Friday after shares in JP Morgan and BofA fell more than 5 per cent each.
SVB’s troubles stemmed from deposit outflows as clients in the tech and healthcare sectors struggled to raise cash elsewhere, raising questions about whether other banks would have to cover deposit outflows with loss-making bond sales. .
In February, US regulators said US banks had unrealized losses on securities of more than $620 billion, underscoring the impact of rising interest rates.
Germany’s Commerzbank issued a rare statement downplaying any threat from SVB.
For now, analysts see the SVB issues as idiosyncratic and comforting from the safe business model at big banks. BofA noted that bond holdings of European banks have not increased since 2015.
Gary Kirk, partner at TwentyFour Asset Management, said: “Typically, banks wouldn’t make large long-term bets with deposits, but at such a rapid rate it’s clear why investors might be worried and the selling now and the question later.” asking.”
Read also: The specter of transition haunts markets after the Silicon Valley bank crisis
darlings no more
Even after a first-quarter jump in stock prices, higher rates have dampened willingness to impose penalties on early-stage or speculative businesses, especially established tech firms that have issued profit warnings and cut jobs.
Tech firms are reversing the pandemic-era euphoria, cutting jobs after years of hiring. Google owner Alphabet plans to lay off around 12,000 employees; Microsoft, Amazon and Meta are removing about 40,000 together.
Bruno Schneller, managing director of Invico Asset Management, said, “Despite being a rate sensitive investment, the NASDAQ has not reacted to the implications of interest rates. If rates continue to rise in 2023, we could see a significant sell-off. “
default risk
The risk premium on corporate debt has fallen since the beginning of the year and indicates lower risk, but corporate defaults are on the rise.
S&P Global said Europe had the second highest number of defaults last year since 2009.
It expects US and European default rates to reach 3.75 percent and 3.25 percent respectively in September 2023, up from 1.6 percent and 1.4 percent a year earlier, with pessimistic forecasts of 6.0 percent and 5.5 percent “out of the question”. No. ,
And with defaults rising, attention has shifted to the less visible private debt markets, which have grown from $250 billion in 2010 to $1.4 trillion.
In a low-rate world, the largely floating-rate nature of funding appeals to investors who can get returns down to the low double digits, but now that means interest in the form of central banks raising rates. Cost has increased.
crypto winter
Bitcoin staged a recovery at the start of the year but was at a two-month low on Friday.
Caution remains. After all, rising borrowing costs rocked crypto markets in 2022, with bitcoin prices plunging 64%.
The collapse of various major crypto companies, most notably FTX, caused huge losses for investors and prompted calls for more regulation.
Shares of crypto-related companies plummeted on March 9 after Silvergate Capital Corp., one of the largest banks in the cryptocurrency industry, announced it would be ceasing operations, sparking a crisis of confidence in the industry.
For sale
The real estate market started declining since last year and house prices will further decline this year.
Fund managers surveyed by BofA see China’s troubled real estate sector as the second most likely source of a credit event.
European real estate reported a level of distress not seen since 2012 as of November, law firm Weil, Gotshall & Manges found.
How sector funds are important. Officials warned European banks risking a significant profit hit from falling house prices, making them less likely to lend to the sector.
Real estate investment management firm AEW estimates that the sector could face a 51 billion euro debt financing gap by 2025 in the UK, France and Germany.
Asset managers Brookfield and Blackstone recently defaulted on some real estate-related loans due to interest rate hikes and falling demand for offices in particular that hit property values.
“The reality that some prices are not right and probably need to be marked down is what everyone is focused on,” said Brett Luthwaite, global head of fixed income at Macquarie Asset Management.