TURBULENT TIMES
True, the specific problems afflicting SVB seem to stem mainly from its highly specialist business model and poor risk management. Credit Suisse’s deep-rooted challenges and botched restructuring over the past five years have not come as a surprise either. Nonetheless, the past month’s series of events has triggered a wave of concern running through the whole banking sector, causing investors to remain on high alert for further potential breaking points. A fast and decisive response by the authorities suggests that contagion risks should remain limited.
Our central scenario assumes that banking risks remain contained. The recent turmoil is a further warning of the risks posed by the sharp interest rate hikes of recent months. We remain confident that the major US and European banks will be able to cope and that the authorities will put in place the tools to avoid a systemic crisis. However, banking turbulences are likely to affect the macroeconomic and financial environment, and the most recent data support our scenario of a moderate economic slowdown:
Households and corporates still have large buffers. On both sides of the Atlantic, households and businesses have healthy balance sheets that allow them to cope and avoid an excessive slowdown in economies.
A higher level of uncertainty. The current tensions will weigh on the decisions of all economic actors and will tend to slow down economic activity.
Reduced credit activity in the United States. While tensions would remain limited for European banks and large US banks, US regional banks would remain under pressure and could curb their supply of credit to the US economy. Representing more than 40% of the bank credit market, this could significantly accelerate the transmission of monetary tightening initiated for several quarters by the Federal Reserve.
A faster end of the monetary tightening cycle. The current tensions illustrate the difficulties many economies are experiencing as they attempt to absorb a rapid rise in interest rates. Central banks will be more subdued in their upcoming monetary policy decisions, allowing a faster than expected end to the tightening cycle. As such, money markets have begun to anticipate a pause in Fed tightening in the coming months as well as a start to the rate cuts in H2-23.
LISTEN TO THE NEW EPISODE OF THE INVESTMENT CHAT PODCAST
This month Fahad Kamal, Chief Investment Officer, and Andrew Thompson, Head of Investment Management at SG Kleinwort Hambros, discuss recent turmoil in financial markets, its impact on client portfolios and how we are positioned to navigate the latest volatility in markets.
Tune in to hear their thoughts.
