It was a week of market turmoil that began with the collapse of a small US bank, turned into a panic for the global financial system and ended with a bold effort to stem the cascading crisis.
And it was the clearest illustration yet of the dangerous side effects of central bank drives to raise interest rates.
In the year since the Federal Reserve began raising rates in an effort to stamp out runaway inflation, investors have seen shares of speculative tech companies plummet, emerging markets default and the fledgling cryptocurrency market crash.
This week, it was the collapse of Silicon Valley Banka midsize bank that predominantly served start-ups and venture capital firms, which incited chaos in the markets and raised fears of a financial crisis.
Stocks swung wildly from day to day, oil prices fell to lows not seen in more than a year, and government bond yields suddenly reversed their rally as investors began to wonder about the impact of escalating crisis in the economy. The dust is yet to settle. Here’s a summary of what happened in the markets this week and what it tells us about investors’ view of the world going forward.
A crisis in small banks was triggered by a collapse in California.
The trouble began on March 8, when Silicon Valley Bank disclosed heavy losses on its portfolio of government bonds and mortgages, seemingly safe investments that backed the bank’s deposits and had been hit by rising interest rates. The bank’s shares plummeted, depositors rushed to withdraw their money, and within days, authorities seized control of the bank (as well as New York-based Signature Bank), vowing to keep it open to the public.
But in the markets, investors couldn’t shake concerns that other banks were facing similar problems, and that induced panic at a number of small lenders, including First Republic Bank, PacWest and Western Alliance. He wave of sale in its shares appeared to decline on Thursday, after a group of rival lenders said they would bolster First Republic with $30 billion in deposits. Then, on Friday, sales resumed, and First Republic fell another 20 percent.
The sale has left bank shares markedly below what they were before Silicon Valley Bank’s collapse. First Republic has lost more than 70 percent of its value since the beginning of the month, PacWest more than 60 percent and Western Alliance more than 50 percent.
The stock market in general seemed to be looking past this week’s turmoil.
The good news for most investors is that the S&P 500 was resilient to concerns that centered on the banking industry, and after a big rally on Thursday, the index was on track to end the week with a gain of more than of 1 percent.
It shows that, at least for stock investors, the crisis in the banking sector seems mostly contained. He helped get US and European lawmakers to intervene to back their banks. Authorities guaranteed deposits At SVB and Signature, and in Europe, Credit Suisse said it would take advantage of a $54 billion lifeline from the Swiss National Bank after investors started panicking over its financial state, albeit for very different reasons than SVB.
There are also some features of the S&P 500 that may mask some of the pain below the surface. Insulated from problems at regional banks, Microsoft, Apple, Alphabet and Meta rose more than 10 percent this week. The sheer size of these big tech companies means that their earnings lifted the entire index.
But investors in other markets are worried about the economy.
Perhaps the clearest evidence of a change of heart about the economy came in the government bond market. On Wednesday, the yield on two-year US government bonds, known as Treasuries, plunged by a magnitude not seen since Black Monday in October 1987, one of the worst market declines on record.
The two-year yield is a barometer of changing expectations for interest ratesand had been rising rapidly as investors bet on further rate hikes from the Federal Reserve.
In early March, the yield topped 5 percent for the first time since 2007. By Friday, the yield had fallen to just under 4 percent, a big turnaround by bond market standards.
The signal from the markets was clear: the Fed will have to start cutting interest ratesinstead of increasing them, sooner than previously thought, something he normally does only when the economy is struggling.
It’s not just the US economy that worries investors. A drop in commodity prices this week shows they are also worried about the global economy.
Crude prices are illustrative of this. After suffering its second steepest drop of the year on Wednesday, followed by another sharp drop on Friday, a barrel of West Texas Intermediate crude is now at its lowest price since late 2021.
Oil demand is global, making it a barometer of the health of the world economy. It often fluctuates with economic news from other parts of the world. When things are booming, the demand for oil is high and oil prices tend to rise. Such a steep drop is a warning that investors fear demand will decline if the economy falters.
In other words, it may not be over yet.
For now, a semblance of stability has returned, but investors remain puzzled by the possibility of further damage, illustrated by the continued gyration of bank stocks.
When asked about possible risks, some analysts point to other corners of the market susceptible to high interest rates, such as the corporate debt market that soared after the 2008 financial crisis. Pain in the banking sector could also prompting lenders to pull out of new business, restricting access to a crucial source of cash in case businesses start to run into trouble: restrictions that could hurt growth.
And, of course, a big fear for investors is often that something hasn’t been discovered yet, like the trouble at a regional bank in Silicon Valley a little over a week ago.