Global shares take hit as US banking crisis looms

London — Global shares slid on Tuesday as a brewing US banking crisis prompted investors to downgrade their expectations for interest rate hikes, even ahead of important inflation data later in the day.

As recently as a week ago, investors were just recovering from a reality check that prompted many to assume rates around the world were likely to head much higher and stay there for longer than previously expected.

In less than a week, three US banks have collapsed. It has been the failure of technology sector lender Silicon Valley Bank (SVB) that has rattled investor confidence and triggered a rush into safe-haven assets such as bonds and gold.

Banking stocks around the world have shed hundreds of billions of dollars in value in a matter of days, while the government bond market has seen one of its biggest rallies in decades.

The MSCI All-World index was down 0.5% on the day, largely due to steep losses across Asian equity markets, while in Europe shares entered a third day of dips, down 0.1%.

Short-dated US Treasury yields rose 14 basis points to about 4.17%, but given that on Monday they posted their largest one-day drop since 1987, the rise on Tuesday still left yields at their lowest in six months.

Many have drawn parallels to the 2008 financial crisis, when indicators of financial market stress shot up and equities crumbled. But Societe Generale chief currency strategist Kit Juckes said the current situation was far more similar to the US savings and loans crisis of the 1980s, in which hundreds of smaller banks folded when the Federal Reserve (Fed) increased interest rates to control inflation.

SVB, which was the 16th biggest US bank at the end of 2022, is the largest lender to fail since 2008. Specifics of the tech-focused bank’s abrupt collapse are still something of a jumble, but the sharp rise in Fed rates in the past 12 months, which tightened financial conditions in the start-up space in which it was a notable player, seemed front and centre.

“I don’t think this is a systemic global banking issue. If it’s an issue, it’s an issue of a smaller but less-regulated bank that has been growing very fast on the back of being less regulated in a stable environment that has turned nasty,” Juckes said.

“When I look at (the savings and loans crisis), we had a very mild recession, even though we were worried about it at the time. We had a very big interest rate reduction after a very big interest rate increase,” he said.

“(SVB) seems very unlikely to have very big systemic implications, particularly when US authorities have come in so quickly to start tackling it.”

Overnight the VIX volatility index, nicknamed Wall Street’s “fear gauge”, neared six-month highs, and other indicators of market stress showed early signs of strain. An index of bond market volatility — the ICE BofA Move index — had hit a 14-year high by Monday’s close.

Watch the plumbing

The S&P banking index fell 7% on Monday, its largest one-day drop since June 2020. Shares in non-US lenders have come under intense pressure and a number of indicators of banking sector credit risk are showing signs of stress.

“Interbank markets have become stressed,” said Damien Boey, chief equity strategist at Sydney-based investment bank Barrenjoey.

“Arguably, liquidity measures should have stopped these dynamics, but Main Street has been watching news and queues — not financial plumbing,” he said.

Yields on government bonds from the US to Germany and Japan have dived in the past week. German two-year yields, which fell by the most at least since reunification in 1990, while Japanese yields have fallen by the most in decades.

Elsewhere, the dramatic re-pricing of US rate expectations has knocked 1.5% off the value of the US dollar in the past week, which in turn has helped encourage a push into gold, a traditional safe haven that has gained 5% in the past week alone to trade at about $1,900/oz. 

The dollar gained some respite on Tuesday and was last up 0.7% against the yen at ¥134.11 and up 0.3% against the euro at $1.070.

Data at 12.30pm GMT on US consumer inflation had been a set piece for markets before the failure of SVB, but given the volatility, Tuesday’s figures may have little effect on expectations for the Fed’s meeting next week.

“I always thought that with inflation where it was, that central banks would keep hiking until they broke something, which was especially likely with the yield curve so inverted. Now they have broken something, is that enough for a pause? Much will depend on whether markets and contagion risk can calm quickly enough,” Deutsche Bank’s Jim Reid said.

Nerves have capped oil prices, with Brent crude futures slipping below $80 a barrel.