This article first appeared in Capital, The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023
JUST as the market was about to recover from the failures of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, liquidity concerns at leading Swiss lender Credit Suisse Group AG sparked another round of sell-offs in global equities. Spooked by the collapse of three US regional banks over five days, it was a roller-coaster ride for global financial markets last week — not the first surprise and likely not the last until the world is certain where the US Federal funds rate is headed.
The Malaysian stock market was not spared. The FBM KLCI touched its year-low twice last week as investors sold risky assets in favour of safe havens.
The 30-constituent index fell below 1,400 points last Tuesday, as investors sold their shares in banking stocks. It saw a brief rebound on Wednesday before the selling continued on Thursday, as fresh fears emerged from the banking sector led by liquidity issues at Credit Suisse.
“The market sentiment is already weakened from the collapse of the three banks in the US led by SVB. We expect the market to remain volatile in the coming months as banking fears continue to loom over the market, as well as the upcoming US Federal Reserve’s decision on its interest rate hike,” a head of research at an institutional fund tells The Edge.
“It remains to be seen if the Fed will pull the brakes on its interest rate hikes. Following that, the US corporate results season is coming in the next two weeks, in which we expect lower earnings, especially from the technology sector due to high inflationary pressure.”
He points out that the overall weakness in the market was mainly led by sentiment rather than fundamentals.
Last Wednesday, the share price of Credit Suisse fell as much as 31% in the biggest one-day sell-off, after Saudi National Bank — its biggest shareholder with a 10% stake — said it would not be providing the bank with any more financial assistance, setting off worries of a spreading financial contagion.
By Wednesday evening, Switzerland’s central bank Swiss National Bank and financial regulator Finma said there were “no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market”.
The central bank also said it would provide liquidity to Credit Suisse if necessary. Early Thursday, the beleaguered lender said it would borrow CHF50 billion (RM243 billion) from the central bank and offered to buy back US$2.5 billion worth of US debt and €500 million of European debt.
The news gave Credit Suisse shares a boost, jumping the most in history at the opening of trading last Thursday before paring most of the gains at the time of writing.
Analysts view the bank failures in the US as containable given the prompt action of regulators in ensuring depositors have access to their savings. Even those with funds exceeding the maximum government-insured level will be made whole, according to a joint statement by US Treasury Secretary Janet Yellen, Fed chair Jerome Powell and Federal Deposit Insurance Corporation chair Martin Gruenberg on Sunday evening, following the closure of Signature Bank on March 12.
“The markets are very sensitive to negative news flow, especially after a US bank disappears in one day,” says a fund manager.
Malacca Securities head of research Loui Low Ley Yee expects that the main factor that will impact the market moving forward is the Fed’s interest rate decision this week. The Federal Open Market Committee (FOMC) will meet this Tuesday and Wednesday (March 21 and 22).
“As of now, the market has stabilised after the efforts by the Fed and Treasury Department in the US. Also, with the Consumer Price Index (CPI) coming in at 6% — within expectations — it should normalise at least in the near term until the next event, which is the FOMC meeting, on the tone from the Fed, whether it is going to be a less hawkish or dovish tone, or still maintain its hawkish stance. That will determine the direction of the market going forward,” he says.
After a decade and a half of near zero interest rates, the rapid rate hikes that started a year ago are said to be one of the main reasons for the collapse of SVB, Signature Bank and Silvergate Bank, which are described as the worst banking failures since the 2008 global financial crisis.
In a nutshell, SVB had invested in long-dated US government bonds, which saw prices fall when the Fed sought to battle inflation by rapidly raising interest rates from near zero in early 2022 to reach a range of 4.5% to 4.75% in early February this year. Those “safe haven” government bonds had value at maturity but, unfortunately, as operating conditions soured, SVB’s tech start-up depositors began withdrawing cash deposited with the bank, leading to its collapse.
With the recent bank failures in the US, expectations of an aggressive rate hike by the Fed this week have eased. That’s not to say a rate hike is out the question. Time will tell whether it is just wishful thinking, but some analysts still see the Fed cutting rates as early as June.
According to Barclays Economic Research, the Fed could lean towards no rate hike at the upcoming FOMC meeting due to financial stability concerns.
“Based on the financial market turbulence over the weekend, and signs of a sudden intensification of risk aversion, we now believe that a 50-basis-point hike is off the table for next week and that the decision point will be between a 25bps hike or a pause. We continue to believe that issues with the failed banks were more isolated in nature, rather than systemic, and that markets will most likely settle in the coming days to reflect this,” it says in a March 13 note.
US inflation slowed in February to 6% from 6.4% in January, down from its peak of more than 9% in June last year. Even so, the number was three times higher than the Fed’s inflation target of 2%.
Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre, says the Fed will need to find a delicate balance between fighting inflation and ensuring financial stability stemming from the recent bank fallout that has stirred contagion risk.
“There is a chance that the Fed may pause the interest rate hikes as it will need to assess the contagion effect of the recent SVB collapse. It is too early to say that the situation is under control,” he tells The Edge.
This week’s FOMC meeting will be closely watched as it will not only decide on interest rates but also provide the Fed’s view on the US economic outlook and impact of its aggressive monetary policy on the overall banking sector.
Lee points out that the Fed has to manage its messaging delicately as the mandate of 2% inflation target is still intact, and also to ensure financial stability.
“Presently, the trust in the banking sector is still intact. There is still confidence in the banking system as people who have withdrawn their deposits from the troubled regional banks have placed them with bigger banks,” he adds.
While stocks have tumbled on the negative news flow from the banking sector in the US and Europe, government bonds rallied, sending yields lower.
As the promise of government help for Credit Suisse helped to stabilise capital markets, an interest rate pause by the Fed could go further in soothing investors’ frayed nerves.
Despite the market jitters, analysts remain positive on the local banking sector.
“In our view, the collapse of SVB would have minimal impact on the earnings of Malaysian banks due to their negligible exposure to the US. Hence, the recent selldown of banking stocks would represent a buying opportunity, in our view,” says CGS-CIMB analyst Winson Ng in a report.
His top picks are RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd.
Ng adds that there are potential rerating catalysts for the local banking sector, including higher non-interest income growth in 2023 and potential writebacks in management overlay.
Meanwhile, Malacca Securities’ Low reckons that the situation with the US banks is likely to have minimal impact on local technology companies as well, as SVB mainly served tech start-ups.
“Most of our local tech guys rely on big names such as Apple, TSMC and China exposure. Hence, we believe it should be mild on our tech guys,” he says.
Low believes a driver for the local market will be a continuation of the reopening theme, benefiting consumers and real estate investment trusts, as well as the aviation, tourism and gaming sectors. He expects the FBM KLCI to end the year on a positive note at between 1,500 and 1,550 points compared with the 1,495.49 points registered on Dec 30, 2022.
“Other sectors I’m positive on include oil and gas, while tougher industries include construction, building materials and property,” he adds.
Meanwhile, a head of research says the outlook for the technology sector will depend on the upcoming corporate results season in the US. “This is when the tech companies announce their plans and the kind of demand they expect this year. We expect the technology sector to remain robust, led by the automotive sector and new product launches from phone makers,” he says.
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