Week in Review: March 17, 2023

Markets ended the week mixed as the collapse of Silicon Valley Bank (SVB) continued to reverberate. Despite the negative headlines, the tech-heavy NASDAQ recorded its best week of 2023, aided by falling interest rates, while the S&P 500 notched a modest gain. Fixed income market volatility reached historic levels on sharp swings in market expectations regarding the Federal Reserve System’s next rate hike. The 2-Year Treasury yield fell by more than 0.50% on Monday, before rebounding over 0.25% on Tuesday and remained volatile throughout the week. Those moves exceeded the volatility experienced following the collapse of Lehman, the dot.com bubble, 9/11, and the emerging market crises of the 1990s.

U.S. bank stocks remained pressured as investors sought to determine whether other banks might be susceptible to the same forces/factors that contributed to SVB’s demise. In Europe, Credit Suisse came under intense pressure after its largest backer, the Saudi National Bank, said it would not provide additional capital after purchasing a 10% stake last year. Fearing a collapse, the Swiss government stepped in to provide the bank with $54B in liquidity, which failed to quell concerns. On Sunday, March 19, UBS agreed to acquire Credit Suisse for $3.2B, a 60% discount to the bank’s $8B market cap as of Friday’s close.

Already faced with the difficult task of trying to orchestrate a soft landing, the U.S. Federal Reserve must now balance its inflation-fighting efforts against further exacerbating concerns about the global banking industry. Prior to the collapse of SVB, markets expected the Fed to raise rates by 0.50% at its upcoming meeting this week, and for the Fed Funds rate to end the year at 5.25-5.50%. Now, markets expect just a 0.25% rate hike in March and for the Fed Funds rate to end the year at 3.75-4.0%.