Market Update – 29th March 2023.

The banking sector continues to dominate market sentiment, however, there is a greater sense of calm amongst investors this week following the news that First Citizens Bank in the US purchased all outstanding deposits and loans of Silicon Valley bank (SVB).

Central banks and policymakers have continued their efforts to ease markets’ fears over the health of the banking sector. Investors digested comments from Bank of England (BoE) Governor, Andrew Bailey, this week who described UK banks as resilient with robust capital and liquidity positions that are well placed to support the economy.  He added that while rising interest rates were “an issue” for US banks, they were less likely to affect UK lenders because they were regulated differently.

On Tuesday BoE Deputy Governor, Sam Woods, said that the failure of SVB has highlighted the speed at which money can be electronically withdrawn from banks (or a run on the bank can occur) thanks to the widespread use of online banking and noted that stress tests applied to UK banks would need to be looked at.

With the Financial Policy Committee on the case of ensuring financial stability, the Monetary Policy Committee can focus on its own task of returning inflation to the target. After recent inflation data showed UK inflation increased to 10.4% in February 2023, Bailey also suggested that a recent increase in the number of people retiring early had pushed up economic inactivity while demand in the economy continued to rise, adding to inflationary pressure.

Looking to the US, at a hearing before the Senate banking committee on Tuesday, banking regulators faced questions surrounding the failure of SVB. Officials called the failure “a textbook case of mismanagement” and blamed the bank for failing to alter its strategies as interest rates rose rapidly last year. Three top regulators said that they would support tougher requirements for banks with more than $100 billion in assets.

There was some positive economic data from the US, the consumer confidence board index rose from 103.4 in February to 104.2 in March, greater than preliminary expectations of a 101 reading.  Attitudes unexpectedly rose in March after two straight months of declines, signalling that consumers in the US are becoming a bit less negative about the outlook despite the recent turmoil in the U.S. banking sector, coupled with stubbornly high inflation.

Whilst investors grow cautiously optimistic that much of the turmoil within the banking sector is now behind us, we expect markets to remain on edge for some time.

Still to come this week we have US PCE (the Fed’s preferred measure of inflation), Eurozone CPI inflation, Chinese PMI and Japanese industrial production.

Kate Mimnagh, Portfolio Economist

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