The S&P 500 fell 1.45% after falling nearly 2% the day before. Thus, the flagship US stock market index fell below its 200-day moving average and returned below the downtrend line it managed to break in late January. So “technically” the situation does not look good from the point of view of the stock market bulls.
Nasdaq fell by 1.76% and stopped at 11,138.89 points. Like the S&P500, The Nasdaq Coposite also hit its lowest level since January. The Dow Jones lost 1.08% to 31,881.50 points, the lowest since November. For the whole week, the S&P 500 lost 4.6%, the Nasdaq 4.7% and the DJIA 4.4%.
Similarly to the day before, the Friday sell-off was fueled by troubles in the US banking sector. The Federal Deposit Insurance Corporation (FDIC) – the government agency that guarantees bank deposits – has decided to close Silicon Valley Bank, whose shares had fallen by 60% the day before. The Californian bank failed to raise the necessary capital. You can read more about this in the article titled “Silicon Valley Bank Closed. It is the biggest bank failure since 2008.
The collapse of SVB is the largest US bank failure since the 2007-08 financial crisis. SVB had over $200 billion in assets and specialized in financing young tech companies. It is more than likely that other smaller banks in the United States, whose assets have suffered from the tightening of monetary policy at the Federal Reserve, may soon face similar problems. History has taught us that almost every rate hike cycle at the Fed is accompanied by casualties in the financial sector, as the following graphic from Bank of America analysts illustrates.
The collapse of Silicon Valley Bank overshadowed the monthly data from the US labor market. Data for February showed a very strong rise in employment, higher professional activity of Americans (signified by a rise in the unemployment rate from 3.4% to 3.6%) and slightly lower than expected wage pressure. We write more about this in the text entitled “Another strong data from the US labor market”.
In this context, a drastic change in expectations regarding the March FOMC decision should be noted. On Tuesday, the futures market was leaning towards the option that the Fed will raise interest rates by 50 bp next week. The chances of such a scenario were estimated at almost 80%. But after the SVB failure, the probability of a rate hike of only 25 bp is valued higher. Contracts value the chances of a move at 62%.
It is impossible not to mention here the massive strengthening of the US debt. Only on Friday the yield of 2-year Uncle Sam bonds fell by over 30 bp. after a decline of 20 bps. the day before. In total, the two of us have a reduction of half a percentage point! This happened after the yield on US 2-year bonds exceeded 5% on Wednesday and reached the highest level since 2007.
A strong decline in yields also took place at the “long” end of the US futures curve. Yield of 10Y Tresuries went down by 23bps to 3.69%. The drop in yields signals an increase in the market price of bonds. It is also a sign that investors have suddenly rushed to “safe havens”, reducing their appetite for risky assets overnight.
