First Citizens Buys SVB, As Markets Digest Choppy Session for Deutsche Bank on Friday.
This morning, markets are digesting the news that First Citizens Bank will acquire Silicon Valley Bank’s deposits and loans from the Federal Deposit Insurance Corporation (an independent federal agency tasked with supplying deposit insurance in the event of bank failures). This comes as investors are gathering details on First Citizens purchase of SVB bank which it is hoped will allow markers to come up for some air following a tumultuous month in the global banking sector. According to Reuters “under the deal, unit First–Citizens Bank & Trust Company will assume SVB assets of $110 billion, deposits of $56 billion and loans of $72 billion”. It therefore looks as though it came as a discount rate of some $16.5bn with the failure of SVB estimating to cost the Federal Deposit Insurance Corporation some $20bn.
First Citizens purchase of SVB this morning follows a choppy session in the global banking sector on Friday which saw shares in Deutsche Bank plummeting 8.22% as CDS against the bank soared to their highest level since 2018.
The wider implications that Deutsche’s instability has on the market is hard to understate, given that the Bank ranks as the 21st largest bank in the world by total assets and 93rd by market cap. Friday’s selloff therefore saw shares in other tier one banks slide, including Germany’s Commerzbank which fell some 5% in addition to France’s Societe Generale in addition to Standard Chartered which slid more than 6% during the session.
Given concerns over contagion within the banking ecosystem, policy makers from around the world are looking at ways to increase liquidity between major banks as US authorities, for example are considering expanding emergency lending facilities. Last week, the Federal Reserve announced that they would coordinate with five other central banks to boost liquidity provisions via the standing U.S. dollar liquidity swap line arrangements. This will essentially boost the flow of US dollars, helping to keep credit flowing throughout financial markets. As such, all eyes this week remain on the global banking sector, the health of its key players and central bank action in the wake of such tumult.
WTI Crude futures have opened higher this morning, edging closer to $71dpb and advancing on gains made last week after investors weighed on the prospect that the Fed may soon approach their terminal rate. Brent has also seen an appreciation of around ¾ of a percent during today’s session, though the rise comes amid JPMorgan Chase’s forecast that Brent will break below $60 per barrel in the near term. This comes as Goldman Sachs last week cut their Brent crude futures forecast to $94, from $100dbp.
Looking at oil more generally, according to the International Energy Agency, global oil demand could rise by 2m bpd to reach a record level of just shy of 101.7m bpd. According to the IEA, half of the expected rise in demand will be driven by China’s reopening. Over the course of last year, Chinese oil demand dropped on average by 390,000 bpd, which also represented the first annual decline since 1990.
Away from the demand side, the IEA also highlighted potential oil supply side constraint. The group stated that: “World oil supply growth in 2023 is set to slow to 1 mb/d following last year’s OPEC+ led growth of 4.7 mb/d. An overall non-OPEC+ rise of 1.9 mb/d will be tempered by an OPEC+ drop of 870 kb/d due to expected declines in Russia. The US ranks as the world’s leading source of supply growth and, along with Canada, Brazil and Guyana, hits an annual production record for a second straight year.”
The early part of this week is looking fairly light as markets digest a particularly eventful week. Nevertheless, the week will kick off with the Bank of England’s Governor Bailey speaking at the London School of Economics, where people are keen to see whether he may update us on the stability of the UK banking sector given the tumult with Credit Suisse and Deutsche. This is followed by Australian retail sales on Tuesday morning, where the market is expecting to see a print of 0.4%, a sizable slowdown from last month’s figure of 1.9%. US Consumer Confidence comes later that day Tuesday, ahead of Australian CPI on Wednesday.
Wednesday will also see the release of the Financial Policy Committee’s statement, where markets are similarly anticipating some lines on the health of the UK banking sector in light of recent events. Last week, the FPC stated that that “the UK banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.
If you would like a PDF of this commentary, please contact us and we'll be in touch.Contact us
Find out how we have helped our clients meet their hedging requirements.
JP Morgan have made some interesting points in the last couple of days: speaking about the Fed meeting next week, they’re concerned that if the FOMC do press the pause button, but were then forced to resume rate hikes either in July, or after the summer, in the face of stubborn inflation, what would this do to risk appetite in the market, because it might be a bit unnerving to see that the central bank hasn’t got a firm grasp on the problem.
According to the Halifax house price index, the price of residential property fell for the first time since 2012. The 1% depreciation between May 2022 and May 2023 came in line with expectations as analysts assess the impact of higher interest rates on households.
The vast Ukrainian Nova Khakovka Dam has been destroyed in the Russian occupied region of Kherson, Ukraine releasing a torrent of water as concerns for residents and nuclear power facilities up and downstream grows.
Plans have been unveiled for a Universal Basic Income (UBI) trial in the UK, with the think tank Autonomy currently seeking financial backing. It is hoped that the trial will span over two years with participants receiving £1,600 each month and being in control of how they spend or save the funds.
Today all eyes are on US labour market data where the markets will be looking to gain an insight into the health of the US economy and the extent to which the jobs market is feeding into inflationary pressures ahead of the Fed’s meeting on 12 June.
Last night, the House comfortably passed the debt ceiling bill in arguably the most important stage in the process to ensure that the world’s largest economy averts a technical default. The House of Representatives cleared the Fiscal Responsibility Act by 314-117, the bipartisan deal assembled by President Joe Biden and House Speaker Kevin McCarthy.