Global Head of Sales Trading
Summary: Following the collapse of SVB bank in the US, European banks have come under renewed selling pressure as contagion fears grow and the EuroStoxx banks index falls by more than 8%. This article will look in more detail at what has led us to this point alongside what to look for in the price action and why Saxo as a financial institution provides both safety and security.
As the collapse of US bank SVB took place last week, authorities stepped in to contain the fallout and prevent a broader impact on the financial sector. New liquidity measures from the Federal Reserve and the announcement that both SVB and Signature Bank's depositors will be made whole were meant to shield the banking industry from contagion risks.
What we are witnessing now though is further turmoil as markets wrestle with deteriorating financial conditions and fears of contagion outside of the US banks. This is all set against the backdrop of excessively high inflation that central banks globally still need to tackle.
There’s still a lot of leverage in the system and interbank markets are seeing liquidity drying up. Volatility feeds further volatility in a similar feedback loop as we saw during the covid market turmoil and clients should ready themselves accordingly.
From a cross-asset perspective, equities and credit have held up way better than they should have during the whole hiking cycle. Financial sector valuations have especially been booming, which has left the sector vulnerable to a re-pricing. The Stoxx 600 banks have fallen 15% since the SVB story hit last week but the index is still up +23% from the end of September 2022 (as illustrated in the chart). In a way, one could even say that this was long overdue and hence needed, even though the way it is unfolding is far from optimal.
For the simplest, low risk method to earn a return on your money, you may just wish to hold it as cash with Saxo. Saxo offer highly competitive rates of interest across multiple currency pairs.
For those equity investors that simply want to reduce overall risk, short-term bonds or holding cash on their Saxo account should be considered. Clients interested in learning what bonds are and what they can offer a portfolio in terms of income (especially on idle cash) and portfolio diversification can find a lot of useful information in our published Starter Guide. Another consideration to add fixed income diversification is via a bond ETF; the iShares 20+ Year Treasury Bond Fund and iShares USD Treasury 7-10 Year UCITS ETF track the performance of a basket of bonds.
Saxo’s analyst Peter Garnry wrote in a note that small caps are always a bigger risk when financial conditions are tightening, so investors should consider reducing exposure to small caps. Quality companies with low debt levels, high return on invested capital and market leading positions should be preferred. Examples of ETFs providing exposure to different variations of quality are FCF US Quality ETF, VanEck Morningstar Wide Moat, and iShares Edge MSCI World Quality Factor UCITS ETF.
Thinking more about ‘Safe Havens’, John Hardy, Saxo’s Head of FX Strategy pointed toward the Japanese Yen and gold as the two most notable safe stores of value which roared higher as the focus on weak banks weighed on markets.
Those that see the situation worsening before getting better can look to adopt hedging strategies by adding short exposure. There are various instruments available for this on the Saxo platform including Inverse index tracker funds, which provide short exposure to a particular sector or index, buying of put options on individual stocks or a stock index which is like buying insurance, or lastly use of a simple Index CFD. Adding these instruments to a long equity portfolio will provide profits to off-set losses during a market down turn, a few of the inverse trackers include; Lyxor S&P500 Daily Inverse UCITS ETF (DSP5:xpar), Lyxor CAC40 Daily 2x Inverse UCITS ETF (BX4:xpar), Xtrackers S&P500 2x Inverse Daily Swap UCITS ETF (DBPK:xetr), Lyxor EuroStoxx 50 Daily 2x Inverse UCITS ETF (LSK8:xetr).
If the current situation doesn’t spiral out of control, the leading indicator is to look at correlations between bank share price moves. As long as all moves are extremely correlated, the market is macro/fear/risk unwind driven. As soon as correlations start to decrease, that’s the first sign that smart money and fundamentals are behind the wheel again.
Saxo offers very competitive rates of interest on client deposits and has taken strategic decisions that allow us to be in a strong financial position with a sound balance sheet and very low exposure to movements in long term interest rates. Saxo does not have a mortgage or commercial loan book and therefore is not exposed to the inherent risks of credit losses from those activities. Clients and partners can and should continue to trust Saxo to be a safe-haven to place their deposits during this crisis.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
