Weekly Market Wrap | 18 March 2023

#SVBCollapse #AramcoResults #USInflation

#Topic 1: Silicon Valley Bank Collapse

Silicon Valley Bank, which lends a majority of its money to tech companies, collapsed last week, marking the second largest bank failure in the history of the US. 

Why did it happen?

Last Wednesday, Silicon Valley Bank announced that it had sold all of its available for sale securities, incurring a loss of close to $1.8 billion, and that it would have to raise $2.25 billion dollars by issuing shares to shore up its balance sheet. This triggered a bank run and almost $42 billion being withdrawn by the end of the next day. Continuous rate hikes had led to a significant decline in the bonds that were bought during the low interest rate environment, which in-turn led to them sitting on lots of unrealized losses.

What can we expect?

The bond value deterioration has led to many other banks sitting on unrealized losses as well. But one might wonder if their deposits are at risk, and whether or not there are any other bank runs coming up.

To prevent such a scenario from happening again, the Fed has come up with a ‘Bank Term Funding Program’ which would enable banks to take loans for a duration of one year and use the securities that they have as collaterals that will be valued at par. This means that the market value of bonds would not matter much as loans will be taken against the face value of bonds. Furthermore, US President Joe Biden has assured that everyone’s deposits are safe, making the probability of more bank runs lesser. 

Nevertheless, we are in a time filled with uncertainty, and with it comes volatility. While allocating funds, we must not forget that diversification is key.

#Topic 2: Saudi Aramco reports $161 billion in profits

Saudi Aramco reported its highest ever profit of $161 billion for 2022. The net profit increased 46.5% YoY and free cash flows touched a record 148.5 billion mark. They also increased the dividend by 4% and issued bonus shares for eligible investors.

Aramco’s result reflects the increasing demand for its products as a low cost producer, with one of the lowest upstream carbon intensities in the industry. The results are nearly triple the profit that major oil corporation ExxonMobil posted for 2022, and is bolstered by soaring oil and gas prices and an improved margin for its refined products. 

While the oil prices are on a downtrend as a result of increasing inflation and rising interest rates, Aramco’s CEO Amin Nasser mentioned that China’s reopening and the jet fuel demand pick-up, coupled with the limited spare capacity, makes them “cautiously optimistic” in the short to mid-term that the markets will remain tightly balanced in terms of demand and supply.

Source: Saudi Aramco annual report

Nasser also highlighted that the industry is facing a major risk of underinvestment. He mentioned that while the company expects that oil and gas will remain essential in the foreseeable future, he does not see additional investments coming into the industry. He reiterated that the company’s target is not just to expand oil, gas and chemical productions, but also to invest in lower-carbon technologies to reduce emissions.

#Topic 3: US Inflation data for February

On 14 March, the US released its highly awaited CPI data after a highly volatile week in the bond market. The inflation rate was seen at 6% as compared to January’s 6.4%, in line with expectations. The government also highlighted that prices rose 0.4% in February and core prices (excluding volatile food and energy costs) rose 0.5%. 

Why is it important and what to expect?

After Powell’s testimony on Capitol Hill last Tuesday (7 March), the market started pricing in a 50 bps increase with a 70% probability by the Fed in the March meeting. However, after relatively weaker employment data, and the collapse of banks like Silicon Valley Bank and now, First Republic, unrealized losses in bonds started to become a major concern and cause of bank runs decreasing the probability of a 50 bps rate hike to almost 0.

Now that the inflation data is out, it has put the Fed in a very difficult position. The inflation has shown signs of easing and now the market is split between a 25 bps rate hike and no rate hike at all. No rate hike suggests that the Fed views the uncertainty in the markets and economy right now as worryingly high, though it is most likely to be short lived. Most analysts continue to forecast a 25 bps increase in May and considerable uncertainty beyond March 2023.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)3,916.64+2.13%-2.02%+2.42%
Nasdaq 100 (US Tech Stocks)12,519.88+6.53%+3.81%+15.26%
CSI-300 (Chinese Stocks)3,958.82-0.10%-4.23%+1.82%
Bitcoin (in USD)27,378.10+13.08%+11.07%+64.88%

Source: Google Finance as of 18 March, 2023.

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