Despite the recent bank crashes and the increased recession fears they caused, markets have stabilized and performed well in the latter half of March and the beginning of April. Over the past months, the S&P 500 gained almost 7% and holds its position above 4,100. Similar developments occurred for gold and oil prices, with gold being up nearly 7% too, and oil close to 8%. While the gains from the equity markets can be largely attributed to a sign of relief that the banking crisis did not amount to a full crisis and a real possibility of the rate hikes stopping. The strong performance of gold can be largely attributed to the same factors. Within the recent bull run, gold reclaimed the $2000 per ounce mark. While oil plummeted for most of the year, its increase is caused by OPEC+’s last meeting when they announced a sharp production cut.
The crypto industry has been quiet in 2023 thus far. Despite the banking crisis and recession fears, the industry has done. Bitcoin (BTC), the most important coin is almost 80% in 2023 as of the time of writing. While Ethereum (ETH) has been less successful, it is still up 60%. Solana (SOL), a cryptocurrency that has been heralded as Ethereum-killer in 2021 completely collapsed in 2022 when it turned out the chain has substantial security issues. To address these issues the coin has been shut down multiple times which made investors lose confidence in the chain. On 12th April 2023, ETH will implement its Shanghai upgrade which led cryptos rally. The Shanghai upgrade will allow validators and stakers to withdraw their assets from the Beacon chain (the original sub-chain which allowed for the proof-of-stake consensus algorithm), which has not been possible since 2020. In total, more than 16 million ETH were locked on the Beacon chain so far. Although it is another upgrade to the chain, many see this update as “price”-neutral. While it makes staking and validating more attractive now, a lot of capital was locked and will be free for the first time in more than two years. However, most people think that not much will be withdrawn, given the dominance of ETH in DeFi and the relatively high staking yield. Additionally, ETH was worth a lot more and people will want to chase similar highs. While most cryptos rallied ahead of the upgrade, ETH was outpaced by both BTC and SOL. BTC additionally surpassed the $30k mark for the first time in a year ahead of the upgrade. Figure 1 shows the YTD of the three coins mentioned above.
The most notable development over the past two weeks was the collapse and subsequent acquisition of Credit Suisse by UBS. After the collapse of Silicon Valley Bank as well as Silvergate and Signature Bank, the banking sector faced substantial drawdowns. Credit Suisse had been under pressure for a while, largely due to prior scandals in which the bank was involved. It started with a spying scandal involving the prior CEO Tidjane Thiam and more importantly being involved in the Archegos Capital and Greensill Capital collapse. This led to substantial losses to the bank. This is especially notable, as the company struggled with its profitability for a while. In 2022 and in early 2023, the bank was already signaling distress as its largest shareholder, Harris Associates, which held nearly 10% sold its entire stake. The Saudi National Bank stepped in and acquired a stake of around 10% in Credit Suisse. The collapse of SVB and the subsequent announcement of the now ex-CEO of Saudi National Bank that they will not further give capital to the bank. While this is not surprising as a larger stake leads to a lot more regulatory issues. Yet, this announcement was interpreted as a lack of confidence in the bank, which led to a bank run. This started the collapse of the bank. The Swiss government then stepped in and looked for a way to save the bank with the goal of keeping the bank in Swiss hands. The final outcome was that UBS will buy Credit Suisse for 3bn CHF and a substantial involvement by the Swiss National Bank that provides liquidity if necessary and alleviate some of the losses UBS may incur following the acquisition. With the challenging integration ahead, UBS also decided to appoint Ermotti as CEO of UBS who led the company from 2011 to 2020 already.
With the collapse of Silicon Valley Bank early in March 2023, markets are experiencing increased volatility. Especially, the banking sector was hurt substantially. It also led to the collapse of other banks, such as Silvergate and Signature Bank. With the recent shock in the stock market following the collapse of SVB, other banks are feeling the pressure and there may be more defaults on the horizon. Even established banks such as Credit Suisse are now in a very dangerous situation. While the stock market started strong in the year 2023, the most recent shock almost evaporated all the gains of the beginning of the year. The S&P 500 is now only up 2% from the beginning of 2023. The SVB collapse also induced further volatility in the Treasuries market, which was quite volatile even before due to discussion on continuously increased rates by the Fed. The 10-years US Treasuries were close to hitting the 4% mark again, but fell by almost 50bps after the SVB collapse. The impact on 1-year Treasuries was even more severe, resulting in a drop of almost 80bps. Within two days, the 2-year yields dropped almost 50bps, which only happened in five prior crises before. Figure 1 shows the historical drops in 2-year yields after the Black Monday in 1987. Cryptocurrencies also experienced a similar volatility increase. Bitcoin was steadily trading around the $23k and $24k mark in the past month. After the initial announcement, it dropped to $22k and later on shortly below the $20k mark. Nonetheless, it seems that Bitcoin already recovered this shock and surged above the $26k mark.
Although 2022 is over, the problems it brought with it are not. Inflation is still high, albeit not at peak levels of 2022. With this development, central banks are likely to stop hiking relatively soon, given that inflation keeps coming down. In the short-term, central banks will continue to hike with some of them reducing the size of the steps. The ECB raised its target rate in early February by another 50bps and announced they will continue to do so. While inflation in the US is better under control than in Europe, they also have their share of problems with a recession on the horizon. Rates are much higher with a lower (but historically still very high) inflation. The US is also facing the largest yield curve inversion since the 1980s, which is persisting for more than half a year by now. In this ecosystem, it is also not surprising that the US reached another peak in its trade deficit. While these developments are somewhat to be expected from the underlying economic situation, the labour market has been as a positive indicator for the entire 2022. In January 2023, the largest job cuts since 2020 was observed. However, this is largely stemming from huge job cuts of big tech stocks, which have suffered a contraction in 2022 after their bull run in 2021. The job cuts are also understandable given that many big tech firms have had their worst or close to their worst growth rate in their history. Similar things can be observed when looking at their revenues. Regarding the unemployment rate in general, it is still very low and there was consistent decline since the beginning of Covid-19. At least this indicator eases some of the pressure of the otherwise highly uncertain economy. In this ecosystem, market participants expect few further hikes with lower rates towards to the end of 2023 and thereafter. With the strong labour market in mind, it would be a great achievement for the Fed to combat inflation effectively without destroying the currently strong labour market. In this instance, it is realistic, as the cause of inflation were the policies applied during Covid-19, most notably the financial stimulus and essentially unlimited borrowing, led to inflow of available of money, which is in itself independent of the labour market. Figure 1 summarizes the expected development of the Fed fund rate until 2025. In the UK, the situation looks a bit more dire. While the BoE has hiked in similar frequencies, it could not combat inflation as effectively as the US. In addition, the UK is more directly affected by the war, which increases the overall pressure on markets. Despite, the BoE substantially adjusted their recession forecast, in which the GDP should only drop by 0.8% compared to almost 3% in their prior forecast. Figure 2 provides an overview of the new and old forecast of the BoE until 2025.
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