The stock market had a mixed week due to stresses in the banking sector, concerns of a steeper economic slowdown, and hopes that the Federal Reserve would pause or moderate its rate-hiking cycle. While financials and energy shares suffered significant losses, communication services and technology shares recorded strong gains, and mega-cap tech shares with minimal exposure to regional banks performed well. The market also saw increased capital requirements for regional banks as a potential proposal.
The failure of Silicon Valley Bank (SVB) and New York's Signature Bank raised concerns, but the Fed, the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department took measures to safeguard deposits and address potential liquidity pressures. The Fed launched an internal review of its supervision and regulation of SVB.
Investors now expect rates to end the year lower, and futures markets priced in a zero likelihood of a 50-basis-point hike. Credit Suisse's problems also affected the market, but news that the Swiss National Bank was planning to stabilize it fostered a rally.
Investors were concerned about First Republic Bank, which had a focus on the tech sector similar to SVB's. Major banks deposited USD 30 billion with First Republic to calm fears about its balance sheet. However, the bank's shares tumbled again on Friday due to a report in The Wall Street Journal that some of its top executives sold off shares in recent weeks.
Bond yields fell, and credit spreads widened due to the banking stresses. Investment-grade credit spreads widened to a four-month high, while shorter-duration bonds and bonds issued by regional banks experienced significant fluctuations.
Europe and UK
Shares in Europe experienced a decline due to fears sparked by strains in the financial system, with the STOXX Europe 600 Index ending the week 3.84% lower. Major stock indexes in France, Germany, Italy, and the UK also fell. The banking sector within the STOXX Europe 600 Index declined the most, reflecting concerns that Credit Suisse's challenges could create counterparty risk in the financial system. However, news that the Swiss National Bank had offered to provide Credit Suisse with liquidity and that the company had sought to strengthen itself preemptively gave the stock a lift on Thursday.
The European Central Bank (ECB) raised its deposit rate by half a percentage point to 3.0% as part of its ongoing effort to curb elevated inflation. The central bank's projections put average inflation at 5.3% in 2023 and to 2.1% in 2025, while the forecast for growth this year was revised higher to 1.0%. The UK jobless rate was unchanged near a record low of 3.7% in the three months through January compared with the previous three months, and total pay growth in the period slowed to 5.7% from 6.0%.
In the UK budget, finance minister Jeremy Hunt included larger-than-expected spending of about GBP 20 billion, which included measures such as a 100% tax break on business investment, an extension of the energy price cap to help households, and the expansion of free child-care and other reforms to get people back to work. The corporate tax will still rise to 25%, and no new tax cuts were offered.
Chinese stocks had a mixed week, with the Shanghai Stock Exchange Index rising 0.63% and the blue-chip CSI 300 Index falling 0.21% in local currency terms. Meanwhile, the benchmark Hang Seng Index in Hong Kong added 1%. The People's Bank of China (PBOC) announced it would cut the reserve requirement ratio (RRR) for most banks by 25 basis points to boost the economy and ensure liquidity. Additionally, the PBOC injected RMB 481 billion into its financial system via its one-year medium-term lending facility. The central bank's moves follow Governor Yi Gang's surprise reappointment, which has helped to maintain financial stability. China's real estate market has also seen a significant recovery, with new home prices rising at the fastest pace since July 2021. Finally, new bank loans reached RMB 1.81 trillion in February, exceeding expectations and indicating a pickup in economic activity.