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Market Update March 2023

Markets resilient in face of bank failures

  • A small number of regional US banks fail, Credit Suisse taken over by UBS.

  • Global Central Banks continue to increase interest rates, for now.

  • UK inflation unexpectedly increases to 10.4%.

  • Jeremy Hunt delivers his first budget as chancellor.

  • Mass strikes in France against pension reform.

  • Xi Jinping is re-elected to a third term as president of China.

  • Facebook owner, Meta Platforms, announces plans to cut 10,000 more jobs.

  • Argentina's annual inflation rate increases to 102.5%, the highest recorded rate since 1991.

  • The British government bans the use of Chinese-owned video-sharing app TikTok on all government devices.

  • The Scottish Parliament votes to elect Scottish National Party leader Humza Yousaf as First Minister of Scotland.

  • A grand jury in Manhattan, New York City, indicts former U.S. President Donald Trump.

  • A deadly tornado outbreak hits Mississippi, United States.

  • OpenAI launches GPT-4, the next generation large language model for artificial intelligence chatbot ChatGPT.

The big story affecting markets during March was the turmoil within the banking sector, on both sides of the Atlantic. Early in the month, Silicon Valley Bank (SVB), a tech-focussed lender, was shut down after depositors withdrew large amounts of money on concerns at the falling value of the bank’s assets. Two other US banks, Silvergate Bank and Signature Bank, who both specialise in lending to cryptocurrency users, also both failed. The share prices of many smaller regional banks, notably First Republic Bank, fell sharply as depositors rushed to move cash to the deemed safety of larger banks. The turmoil also impacted European banks. Credit Suisse agreed to be taken over by its bitter rival UBS, after being on the brink of collapse. Later in the month, the share price of Deutsche Bank slumped as much as 15%, its biggest one day decline since March 2020, but it stabilised somewhat by the end of the month.

Equity markets fell sharply in the early part of March with heavy buying of put options, which protect investors against market falls. On one day the Chicago Board Options Exchange reported that put option buying hit its highest level since the option markets inception in 1973. This caused the VIX Index, which is traditionally referred to as Wall Streets “fear gauge” to spike sharply higher. Markets and the VIX settled down later in the month, partly due to the swift action of monetary authorities to avoid contagion from the issues affecting the banking sector. Shortly after SVB’s collapse, the US Federal Reserve (Fed) announced the creation of a new backstop facility, allowing deposit taking institutions to pledge Treasuries, MBS and other assets for collateral to avoid further distressed sales of assets and in addition, all depositors will be protected in joint action by the Treasury and Fed resulting in no company facing losses on its deposits.

The MSCI World Equity Index actually ending the month up 0.9%, although the FTSE 100 fell 2.5%, partly due to its relatively high exposure to the financial sector. The key driver for the recovery was hopes that the banking vulnerability could cause global central banks to ease away from their interest rate hiking plans.

At the start of March investors were concerned that the Fed may hike by 0.50% during their March meeting, following comments by Fed Chairman Jerome Powell that large rate increases are still on the table, as well as a strong February US jobs report. The Fed ultimately did still raise rates, but only by 0.25% and signalled that it might end its rate-rise campaign soon. The Fed’s preferred inflation measure, Core Personal Consumption Expenditure (PCE), also rose less than expected in February, with January’s reading also revised down. The Bank of England increased their key borrowing rate by 0.25% during the month as data showed that annual UK inflation unexpectedly increased to 10.4%, mainly because of domestic pressures such as food and drinks, rather than external energy price shocks. UK Core inflation is now 0.7% higher than in the US, having broadly mirrored it through 2022, despite the Bank of England raising rates for the 11th consecutive time since November 2021, taking the base rate from 0.1% to 4.25% in the process.

Away from the banking system it is also worth commenting on the Budget unveiled by Jeremy Hunt during March. The main eye-catching announcement was for the abolition of the pension Lifetime Allowance – focussed on trying to stop NHS consultants from leaving their posts due to punitive tax charges when they vest their pensions. Hot on the heels of the announcement was Labour saying they fundamentally disagree with this decision and would restore the lifetime allowance immediately should they gain power next year. This is an area that requires careful consideration for clients, alongside the increased annual contribution allowances, moving from £40k a year to £60k from 6th April 2023.

Expectations that rates will soon stop rising caused bond yields to drop sharply, particularly those bonds that mature relatively soon. For example, the yield on 2-year US Treasury bonds fell from 4.8% to 4% during the month. Falling yields also helped the performance of technology stocks, and growth stocks generally, which were hit hardest during 2022 when yields rose significantly. The tech-heavy Nasdaq 100 Index rose 7.2% during the month, with Apple and Microsoft performing particularly strongly. These two stocks now account for 13.3% of the S&P 500, which is the highest two-stock weighting in the index since 1978, when the two stocks were IBM and AT&T.

Elsewhere, gold enjoyed a strong month as it benefitted from safe haven buying, as the price of a troy ounce exceeded $2,000 for the first time in a year. It ended the month up 8% although the return to Sterling-based investors will be 2% lower given the weak dollar. Cryptocurrencies such as Bitcoin also enjoyed strong demand because of falling confidence in the financial system.

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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.

It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.

Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.

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