The period February to April 2023 saw investment markets harried by bouts of volatility, particularly in March, yet despite this - most major Western indices managed to finish slightly positive. The S&P 500 rose +2.58% from 4,077 to 4,169 – however, this masked a fall of -7.75% from its peak in early February to the low of 13th March. It was a similar story with the FTSE 100, which rose slightly by +1.27% from 7,772 to 7,871 during the full three months, though it fell -7.50% from 8th March to 17th March. The mid-cap dominated FTSE 250; however, it saw a slight fall of -2.16% from 19,853 to 19,425. In the East, Hong Kong’s Hang Seng index had a difficult period on the face of it after it fell -8.92%. However, it is important not to forget that from early November through to late January, the index surged and was up by +54%.
The hits to sentiment seen in Western markets in March were driven mainly by concerns of a banking crisis brewing. On the 8th of the month, it was reported that Silvergate Capital, a bank specialising in cryptocurrency, would be shutting down and liquidating its assets. This coincided with an announcement from Silicon Valley Bank that they needed to raise $2bn in capital and that they had sold their bond portfolio at a loss. After a call for calm from CEO Greg Becker and a downgrade of their bond credit rating from Moody’s, their share price plummeted by 60%, which created more panic and prompted a run on the bank. The resulting mass withdrawals led to the bank’s failure, and by midday on Friday, regulators had taken control.
That same weekend fears over financial contagion spreading across world markets intensified when New-York based Signature Bank faced a surge of withdrawal requests and similarly saw regulators put the bank into receivership. To quell growing concerns, the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) issued a letter outlining measures to maintain confidence in the US banking system, including a pledge to make depositors ‘whole’ for their losses in the two failed banks. Notably, the letter assured depositors that their funds would be fully restored, which appeared to calm many anxieties in the market.
These problems were not limited to the US, with perennial struggler Credit Suisse being bought out by fellow heavyweight rival UBS in a deal brokered by the Suisse Government after years of tackling a variety of struggles of different forms. In answering the question of why these banks are beginning to experience issues now, the fact that interest rates began their rise from historic lows roughly 12 months previous no doubt goes some way to explaining this. It is generally estimated interest rates take between 12-24 months to feed into the real economy, meaning central banks need to walk a very fine line to make sure they increase rates to levels which sufficiently curb inflation whilst doing so in a manner that does not damage the economy too seriously and in a way that can still encourage economic growth.
Whereas the reaction of the banking sector in March may have prompted central banks to take stock and question whether more rate rises were necessary, the persistence of inflation in especially the UK has been a particularly loud argument for continued increases. March’s rate (released in April) for the UK remains in double figures at 10.1%, against expectations of 9.8% - with it also having been expected to dip under 10% for the February rate (though again came in above expectations at 10.4%). The main driver of this was food price inflation, rising at its fastest rate in 45 years (19.2%). In response to this, the British Retail Consortium did state that ‘as food production costs peaked in October 2022, we expect food prices to start coming down over the next few months.’ This, coupled with overall CPI now due to be compared against figures taken after the energy price rises in April 2022, should mean future inflation figures will begin to see some sustained downward momentum.
There was some positive news to report in April: the UK Government borrowed £12.8bn less than anticipated in the 12 months leading up to 31st March 2023, estimated at £139.2bn instead of £152bn. However, although this could potentially fund pay increases for public sector workers or allow for tax cuts ahead of the next general election, it is important to note that the amount borrowed still represents 5.5% of the total value of the UK economy - the highest percentage since 2014, excluding the pandemic. Additionally, the overall public sector debt as a share of GDP stands at 99.6%, which is the highest level seen since the 1960s.