What are the effects of the banking turmoil?

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Overview of the topics

  • Stocks Highlights: Despite the banking sector, on Friday the Stoxx 600 index closed higher, gaining 7% in the first quarter.
  • Social Data: The collapse of Silicon Valley Bank continues to raise concerns over a potential economic downturn.
  • Financial Data: From 2001 to 2023 there were 562 bank failures, with the majority of those happening during 2007-2009.
  • Onchain Data: During the month of March, investments in Bitcoin-based products rose by 14% to $22.7 billion.
  • Deep Dive: The banking turmoil has prompted traders to convert traditional coins into digital ones.

Stocks Highlights

Banks don't stop the Stoxx 600 index

On Friday the Stoxx 600 index closed higher, gaining 7% in the first quarter despite a few volatile weeks of trade in the banking sector. However, taking into account the whole month, the index closed down by 1.36%.

Graph source: Google

Retail stocks led the gains, extending the Thursday rally and ending up by 1.7% while household goods and financial services both rose 1.2%. However, banks were the sole outlier, closing 0.2% lower despite positive momentum in the week. With this respect, Swedbank was one of the worst-performingEuropean stocks. The positive momentum in the European stock market was driven by cooling eurozone consumer price rises and lower inflation.

Graph source: Eurostat

Eurostat data shows Eurozone headline inflation fell to 6.9% in March, down from February's 8.5%. However, core inflation, which excludes both food and energy, increased from 5.6% to 5.7%, posing a challenge for policymakers at the European Central Bank. ECB policymakers have suggested that higher interest rate hikes are necessary but at a slower pace.

Image source: Twitter

Meanwhile, despite jitters in the banking space, tech stocks are up 19% for the quarter, whereas investors are feeling more confident. The upcoming US inflation read is a catalyst for further market moves. Thus, while inflation has been moving in the right direction, core inflation remains a concern for investors and policymakers.

Social Data

But US investors aren’t so confident…

The S&P 500 index rebounded by 7% in the first quarter of 2023, following a 20% drop in 2022. Similarly, the Nasdaq Composite Index rose by 16.8% in the first quarter, its largest gain since 2020.

Graph source: Google

However, investors are worried about the market's vulnerability. In fact, the collapse of SVB has raised concerns over a potential economic downturn. This could lead to a fall in corporate earnings, which have been estimated to be 20% too high even before the recent banking difficulties. To protect their investments from possible market turbulence, many US investors are choosing to hold higher-than-normal levels of cash.

While some US investors argue that stocks may have priced in a recession during last year's decline, others think that the market will face turbulence, depending on variables such as the severity, length, and the Fed's response to an economic downturn. According to Hans Olsen, CIO for Fiduciary Trust Co. “The answer is an emphatic no, the market is not priced for a recession at all”. For stocks “It means that we can be in for some very nasty surprises over the coming quarters”.

Graph source: Investoom

Even if the Federal Reserve's aggressive interest rate increases have raised many concerns about a potential recession, some analysts predict a mild and short-lived one. Moody's Analytics predicts a "slowcession", which will ultimately avoid an actual contraction, while others warn that a more severe recession could cause a decline of at least 30% in the stock market. Despite the uncertainty, investors are advised to continue investing in a diversified portfolio.

Graph source: Investoom

The worrying of US investors is reflected in their tweets. In the last week, the word SVB has been typed 145 times per day, whereas Credit Suisse placed itself in second place, with 132 tweets every 24 hours.

Financial Data

How to prevent banks from failure?

Since 2008, stronger regulations have been implemented to limit banks' exposure to credit, market, liquidity risks, and also solvency risks. However, such regulations have exposed significant shortcomings in dealing with bank failures, as there were 562 bank failures from 2001 to 2023.

Graph source: FDIC

With this respect, the principal factor that contributed to the development of these business models was the “weaknesses” in funds transfer pricing practices for assets. However, despite these challenges, banks still have a crucial role in matching savers with borrowers and enabling economies to operate smoothly.

Image source: Martin Macko

What about the current banking crisis? Governments have had to step in to prevent the recent turmoil within the banking sector from escalating into a full-blown crisis. This has led to concerns that the regulatory reforms have failed to reduce the risks posed by bank failures to taxpayers. Nevertheless, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has argued that the biggest banks in the world are still too big to fail.

Graph source: SWFI

In particular, the government bailout of Silicon Valley Bank was paid for by fees that banks pay to the FDIC, but there is concern this will lead to higher fees and reliance on taxpayer funds in the future. Furthermore, Karin Keller-Sutter, Switzerland's finance minister, suggested the restructuring of Credit Suisse in line with post-2008 guidelines would have completely triggered an international financial crisis.

Graph source: FDIC

What can we conclude? The financial system is heavily regulated, but this has not made it completely stable or less of a threat to public finances. Executing a deal could eat up billions of dollars of public money through loans and guarantees, which raises concerns about the effectiveness of regulatory reforms.

As a result, global standards for dealing with "too big to fail" banks were put in place after the worldwide financial crisis, but recent events have shown that regulators have not used the mechanisms promised to wind down big banks without destabilizing the financial system or exposing taxpayers to the risk of losses. This means that "too big to fail" is still a problem that has not been solved.

Onchain Data

The cryptocurrency market as an outlier

According to CryptoCompare, assets under management for digital asset investment products rose by 10.9% in March, reaching $13.4 billion. On the other hand, investments in Bitcoin-based products rose by 14% to $22.7 billion.

Bitcoin's share of overall investment hit 72%, reaching a nine-month high in mid-March. However, cryptocurrency-related products labeled "other" saw assets decrease by 13.3% to $1 billion, taking their market share down to 3.2%. This growth in AUM signals the continued bullish sentiment of investors and their increased appetite for digital assets.

Graph source: CCData

Considering the single companies, CI Galaxy was the one that recorded the highest increase in assets for the second consecutive month, rising 20.3% to $553 million. With this respect, CI Galaxy offers mutual funds and ETFs that invest in digital cryptocurrencies, including Bitcoin and Ethereum. However, these funds are high-risk and volatile and investors must be prepared to potentially absorb a full loss of their investment. ProShares follows closely behind with a 19.1% increase in assets, bringing its total to $1.08 billion.

Graph source: CCData


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Deep Dive

The banking turmoil gives BTC a chance

The recent rise in Bitcoin's price has been attributed to a combination of factors, including the collapse of Silicon Valley Bank and a slight drop in inflation.

The crisis has hit cryptocurrency firms hard, but it has also given panicking investors a boost toward alternative assets. Hence, BTC proponents argue that the banking turmoil has prompted traders to convert traditional coins into digital ones. Invite 3 friends to read the full article

News of the week

  • Banks: Britain's digital banks need support amid banking turmoils. [Read more]
  • Technology: Big tech companies cut AI ethics staff, raising safety concerns. [Read more]
  • Markets: US stocks extend rally as traders eye peak rates. [Read more]
  • Investments: Stocks to keep in your portfolio for the next 30 years. [Read more]

Read the full version here.


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