Economic Update - March 2023
Following the recent relating to the takeover of Credit Suisse by Swiss rival bank UBS due to liquidity concerns, we provide the most recent Economic Update, which outlines what has happened, the impact on markets, and any implications for portfolios.
We will continue to monitor the current situation as it unfolds and provide further commentary should events change our current views and outlook for financial markets and portfolios.
During periods of market volatility like we are currently experiencing, it can be reassuring to revisit some tried and true messages for investors.
What has happened in Markets?
It has been a volatile couple of weeks for global financial markets. Events began unfolding less than a fortnight ago with the failure of US regional banks Silicon Valley Bank (SVB) and Signature Bank, which caused market jitters and triggered swift action from US regulators to guarantee bank deposits designed to isolate the fallout and bolster confidence. This was followed by an announcement that another US regional bank First Republic Bank had received an emergency injection of liquidity to help it meet its obligations to depositors. Then late last week, a longstanding set of problems at Switzerland’s second largest bank Credit Suisse, a far more consequential institution, turned into an emergency that required first a loan facility from the Swiss central bank, followed by a hastily orchestrated takeover by its main rival bank UBS over the weekend.
Most major share markets are still posting positive returns in 2023, despite the drag of the directly impacted banking sector. Fixed interest (bond) markets have performed well. Bond yields moved lower and bond prices moved higher as investors flocked to the safety of government-backed bonds and markets digested the prospect of a slower pace of rate rise by global central banks. The following table shows how major financial markets performed over the past two weeks as well as the calendar month and year to Friday (17 March 2023):
What is Causing the recent market volatility?
|TRAILING TOTAL RETURNS (%)|
|Major Indices||Last Week|
|Australian Fixed Interest||+0.9%||+1.6%||+2.4%||+3.9%|
|Global Fixed Interest||+1.4%||+1.1%||+2.3%||+2.5%|
|Global Financials Sector||-6.6%||+6.3%||-12.2%||-6.0%|
Last week, events focused on the collapse and subsequent bailout of US regional banks Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank, primarily due to questionable business models, poor risk management, and weak regulatory oversight. Attention has since turned to Europe, with liquidity pressures on Credit Suisse culminating in a US$3.2 billion takeover by its main rival, UBS, in a government-brokered deal. Rather than suffering a sudden fate as SVB and Signature Bank did, Credit Suisse’s demise has been bubbling away for a long time, with missteps over risk management going back years, being caught up in scandals like money laundering, and reporting a heavy losses.