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The weekend came just in time. If we’re lucky, the break will give traders time to clear their heads after a dizzying Friday, when a US banking stock meltdown spread to Europe and sent fear and panic around the world.
If we’re unlucky, then hold onto your hats. Analysts are bracing themselves for another rash of selling on Monday, and things could get a lot worse.
California-based Silicon Valley Bank collapsed on Friday morning after it suffered a bank run and capital crisis.
SVB was the second-largest banking failure in US history, yet nobody saw this coming. As recently as Wednesday, all seemed well at the respected bank.
Then it surprised investors with news that it needed to raise $2.25billion (£1.875bn) to shore up its balance sheet, and all hell broke loose.
Terrified depositors and investors raced to pull their money, causing a run on the bank. Yesterday, regulators shut it down before more damage was done.
SVB isn’t the only US financial institutions to go to the wall this month. Its collapse came two days after Federal Reserve member bank Silvergate went into liquidation, after racking up huge losses on crypto trading.
The big question now is how far the contagion spreads.
Billionaire hedge fund manager Bill Ackman has terrified everybody by comparing SVB to Bear Stearns, the first lender to go under at the start of the global financial crisis in March 2008.
“The risk of failure and deposit losses here is that the next, least well-capitalised bank faces a run and fails, and the dominoes continue to fall,” he wrote on Twitter.
Ackman is not the only one to draw parallels with the 2008 banking meltdown.
A writer on respected financial website Seeking Alpha, who identifies as CashFlowHunter, said he had witnessed “up close” the failure of major financial US institutions during the financial crisis.
The rollcall includedd huge names such as Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide Financial, AIG, and Fannie Mae and Freddie Mac.
CashFlowHunter cautioned: “I have to say that none of those companies officially imploded as quickly as SIVB blew up today.”
Fawad Razaqzada, market analyst at City Index and Forex.com, said contagion fears have rattled the mighty US bond market as investors fear “another Lehman-style collapse in the financial sector”.
Lehman Brothers went bust in September 2008, triggering the financial crisis.
On Friday, US banks were crashing all over the place, with First Republic Bank down and Signature Bank both down more than 20 percent. Along with SVB they hold a staggering $500billion in combined deposits.
Charles Schwab ended last week down 22.98 percent, with US Bancorp down 13.79 percent, Wells Fargo down 11.79 percent and Bank of America down 11.70 percent.
Markets in London, Shanghai, Frankfurt and Tokyo all fell, with European stocks Friday’s biggest losers, said Chris Beauchamp, chief market analyst at online trading platform IG.
UK banks were swept up in the turmoil, too, with HSBC, Barclays and Standard Chartered all falling around five percent on Friday and Lloyds down four percent.
Molten Ventures, a London-listed venture capital fund that invests in global banking app Revolut and has a £150million debt facility with SVB, fell 18.5 percent on Friday morning.
Beauchamp reckons Monday will be brutal. “It certainly isn’t wise to stand in the way of the avalanche of selling, which looks unlikely to end soon.”
READ NOW: ‘Debt trap’ to trigger financial crash as interest rates race past 6%
Banks are under pressure as central bankers continue to hike interest rates in a desperate bid to bring today’s raging inflation under control.
US Federal Reserve chair Jerome Powell has warned rates may have to stay high for longer, which would threaten company profitability, housing markets and consumer confidence.
This will punish banks, too, as their losses will surge if bad debts rocket.
Rising interest rates are rattling investors all over the world, including the UK, said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “London-listed banks are groaning under a weight of worry about just how much value their large bond holdings will drop.”
Yet Streeter said UK banks may avoid meltdown due to defensive action taken after the financial crisis. “The Bank of England says UK banks are sufficiently capitalised and strong enough to deal with the storms.”
We will soon find out if it is right. Maybe as soon as Monday morning.
Whatever happens, it’s a sign that the era of cheap and easy money is now gone for good.
