International market volatility spiked in March, but central bank actions and positive economic data restored confidence. Bond markets priced in easier monetary policy.
Anatomy of a crisis
Market volatility spiked in March as investors weighed up the state of financial stability after a period of rapidly rising interest rates and high inflation. The collapse of US-based Silicon Valley Bank (SVB) sparked an exit from depositors and investors, which quickly impacted risk appetite for the broader banking complex and saw bank share prices hit hard. While SVB was a regional bank, largely exposed to the technology sector and with specific nuances, the impact of higher interest rates on its bond holdings and poor sentiment quickly turned a spotlight on other entities with possible vulnerabilities. US policymakers promptly stepped in to secure deposits and restore confidence, which were tested as the fallout from SVB extended to several other US banks.
Concerns spread from the US to other parts of the globe, but more prominently in Europe. The most noteworthy casualty was one of the major Swiss banks, Credit Suisse. Liquidity was extended by the Swiss National Bank, but the bank was ultimately taken over by UBS. Several challenges had plagued Credit Suisse for some time, but poor financial results earlier this year, including an adverse audit finding, left it further exposed to negative market movement and sentiment. A level of stability has returned to markets, but confidence is often hard-won, and contagion remains a prominent concern when it comes to financial stability.
After some upside surprises in the previous month, headline inflation across several regions continued to moderate as the impact of high energy prices subsided. However, high levels of core inflation suggest broadening pricing pressure in areas such as services, which remains a concern.
Major central banks faced a more delicate balancing act as they seek to continue the fight against inflation, without compromising financial stability. Despite the ructions around Credit Suisse and meaningful volatility in bank share prices and credit risk gauges, the European Central Bank (ECB) hiked interest rates by 50bps while also emphasising the additional tools at their disposal to provide liquidity to the financial system. In the United Kingdom, headline CPI increased to 10,4% in February from 10,1% the prior month, setting the scene for the Bank of England (BoE) to increase interest rates by 25bps. The US Federal Reserve (US Fed) also increased the policy rate by 25bps to a target range of 4,75% to 5,0% – the highest level since 2007.
Comments on tighter lending conditions in the US and possibly Europe reinforced the possibility of slower economic growth in the developed world.
Markets priced for easier monetary conditions, driving bond yields lower. With this backdrop, the US dollar depreciated by 2,3% on a trade-weighted basis in March, leaving the greenback 1,0% weaker over the quarter.
The reopening of China led markets to a strong start in January, while constructive economic data in the first quarter drove positive returns across developed market equities, despite the volatility from the banking crisis in March. The decline in bond yields in March drove a rally in interest-rate- ensitive growth stocks, with the technology-heavy Nasdaq 100 gaining 9,5% over the month, bringing the year-to-date gains to 20,8%.
China announced an economic growth target of ‘around 5,0%’. While this is much lower than historical targets, it is a more achievable goal in the current environment. Domestic activity gauges have improved since the reopening of the economy, although the pace is arguably less than many market participants had priced in for January. Despite the recovery, domestic inflation has remained broadly contained, allowing the People’s Bank of China (PBOC) to cut the reserve requirement ratio for banks by 25bps. The Hang Seng gained 3,5% over the month, while the MSCI Emerging Markets index advanced 3,1%.
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