Catastrophe averted? That’s what the media is saying after the US Government and regulators stepped in to backstop depositors with money at Silicon Valley Bank. This was the second largest bank failure in US history. Silicon Valley Bank was the 16th largest bank in the US but there were real fears that its fall would create a domino effect. A domino effect which would also see major bank runs.
The Government and other parties acted in accordance, and alleviated panic. Depositors at both the failed Silicon Valley Bank (SVB) and Signature Bank in New York (which got hit on Sunday) will have access to their deposits starting Monday (today).
The US Treasury labeled both SVB and Signature Bank as systemic risks thereby giving it the authority to unwind both institutions in a way to ‘fully protect all depositors‘. The FDIC’s deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits.
Regulators have said that there would be no bailouts and no taxpayer costs associated with the new plans. Shareholders and unsecured creditors will not be protected and will lose all of their investments.
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” said a joint statement from Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg.
The Federal Reserve is also doing their part. The Fed will be creating a new Bank Term Funding Program which will be aimed at protecting institutions affected by the market stability caused by this shock bank event. The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasury’s, agency debt and mortgage-backed securities.
“This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”
The Treasury Department is providing up to $25 billion from its Exchange Stabilization Fund as a backstop for any potential losses from the funding program. A senior Fed official said the Treasury program likely won’t be needed and will exist only as a safeguard.
Markets have reacted positively to these developments, and it appears as if a crisis has been averted.
Intraday, the markets are all popping. However, I want to remind regular readers of our analysis last week. They all still apply:
Both the Nasdaq and the S&P 500 are still testing major support levels. They are holding up well for now, but we need to see a stronger green candle at these levels.
Both the Dow Jones and the Russell 2000 are the markets I am paying close attention to. Both of these markets have confirmed breakdowns. The Dow must reclaim the 32,600 zone to end the current downtrend.
The Russell is crashing, and the reason I think this is significant is because this index tends to lead the S&P 500, the Nasdaq and the Dow Jones. If this index does not bounce from here, then there is more room for further downside on the major US indices. However, 1880 still needs to be taken out for all fears of more lows and this downtrend to end.
We are seeing a risk off move. Someone is coming in to buy bonds. It ain’t the Fed, but investors. A risk off move is in play with money running into the safety of bonds. Just a reminder: when bonds get a bid, bond yields drop. Therefore this chart of yields is indicating a major move into bonds.
Gold is also seeing a big move. More importantly, this risk off move into the precious metal could see us close back above $1900 by the end of the trading day. It would signal the end of the recent downtrend and the beginning of a new uptrend. One which could see gold take out previous all time record highs.
Now there is one final key takeaway for readers. With the recent stock market pop, financial media is reporting that markets are green because there is now a real chance the Fed will back off interest rate hikes given that two banks have felt the pressure from high interest rates. The ‘system’ was already breaking and feeling the pressure. If the Fed were to continue raising interest rates, perhaps larger banks would come under pressure.
The problem is that the Fed has been adamant on taming inflation. If February 2023 CPI data comes out higher than expected, it would really put them between a rock and a hard place. Does the Fed stop raising rates but then potentially allow inflation to become entrenched? Or do they keep raising rates until something breaks?
I would also keep an eye on the bank stocks, specifically US regional banks such as First Republic Bank: