A lot has happened over the past few days in the US banking sector. Silicon Valley Bank collapsed in the aftermath of a bank run and taking huge losses on its bond portfolio. FDIC took control over the bank to assure orderly liquidation. Federal Reserve and US Treasury also announced actions to ease developing crisis and limited potential contagion. A relief on the markets could be spotted first but moods turned sour once again. Here is quick update on the situation.
What happened over the weekend?
The Federal Reserve announced an emergency programme for banks that will help them with liquidity and allow them to service depositors. As part of this programme banks will be allowed to put up bonds as collateral at par value to access liquidity. This will prevent need to sell hasty sell bonds, which dropped in value due to aggressive rate hikes, should excessive liquidity needs arise. On top of that, the US Treasury Department and FDIC assured that all depositors will be protected. The UK subsidiary of SVB was already sold to HSBC and media reports hint that other banks are lining up for other parts of business as well.
Apart from that, another US bank was shut down by regulators over the weekend - Signature Bank. Reasons behind the move was systemic risk the bank posed. While the actions described in the paragraph above led to some relief after opening of global markets after the weekend, moods turned sour after the launch of European cash sessions and US premarket trading. Heavy premarket losses in more US banks, like for example First Republic Bank (FRC.US, -65%) or Western Alliance (-65%), pushed European indices and US index futures into losses.
What's next?
Question 'what's next' is tricky. Authorities assured that deposits are protected and therefore there is a chance that the situation won't spill over the whole economy and trigger harsh recession. On the other hand, it also shows that shareholders will be the ones paying full price and it is dragging down shares of other, smaller banks as investors flee uncertainty related to those.
We get to hear from US authorities on the situation. Fed will hold an emergency meeting to discuss whether actions are needed while US President Biden is set to speak on the matter at 1:00 pm GMT. Meanwhile, markets are freefalling with Nasdaq-100 (US100) erasing all of the previous gains and trading 0.5% lower on the day. Index is once again testing 11,850 pts support zone that serves as a floor for recent sideways move. A break below would pave the way for a test of the 61.8% retracement in the 11,600 pts area.
US100 at H4 interval. Source: xStation5
