Weekly house view | US banks bleed deposits

As expected, the Federal Reserve delivered a 25bps rate hike last week. Fed chairman Jerome Powell mentioned that the Federal Open Market Committee had actually considered a rate pause as recent events in banking were seen as likely leading to a tightening in credit conditions that would be equivalent to rate hikes. Continued stress in parts of the US banking system could be seen in the decline in bank deposits. Regional and community banks saw their deposits drop by USD120 bn in the space of a week up to 15 March, at the height of the tumult surrounding Silicon Valley Bank (SVB). Liquid deposits at all US banks fell at an annual rate of 6% in the same week, the largest decline since the 1970s. Thus, bank borrowing from the Fed remains high, either at the Fed’s discount window or from its emergency Bank Term Lending Program. But clear direction on beefing up US deposit insurance (an issue that led to a deposit run on SVB) is still lacking. Former US Treasury secretary Larry Summers has urged US regulators to explicitly pledge to back the uninsured deposits of failed banks, but Congress is unlikely to approve such a measure unless there is systemic risk. In view of continued uncertainties, we remain underweight equities overall.

Continued disquiet over the Swiss authorities’ decision to wipe out Credit Suisse’s convertible bondholders and markets’ search for the next ‘weakest link’ means that European banks also remain under pressure, despite the reassuring words of European Central Bank and government officials. Volatility in fixed-income instruments has been heightened by lack of liquidity. In other news, Germany and the European Commission reached a deal on a plan (that Germany had threatened to block) to phase out combustion-engine cars by 2035. The investment and new infrastructure needed to cater for CO2-neutral cars and other energy initiatives mean we are positive on the EU’s green Marshall plan. Having rescued the Swiss banking sector, the Swiss National Bank (SNB) hiked rates by 50bps to 1.5% last week. The SNB said it expects consumer inflation to be slightly above its 2% target in Q4 2025, suggesting that more tightening is coming. The SNB continues to intervene to keep the Swiss franc strong in order to reduce imported inflation, selling over CHF20 bn of foreign-currency denominated bonds in Q4 2022 alone. 

The Bank of England and Norges Bank each hiked rates by 25bps last week and indicated the likelihood of more hikes. Yet the pressure in banking has set markets thinking that the global tightening cycle is close to an end. This has led to falls in short-term bond yields and created large losses among investors (including hedge funds) whose strategies were built around rising rates. Last week’s announcement of a debt restructuring plan for Chinese property group Evergrande fits with our positive view on distressed assets, although we expect more accidents in credit risk and elsewhere this year. We are therefore underweight high yield and overweight gold.