| US banking fallout sends shockwaves through the financial sector.. |
| GBP |
| The Pound finds itself being the victor from an out-the-blue scenario over the weekend. Any major bank that gets into financial trouble is going to produce negative emotions because of what happened in 2008. The fact that SVB (16th largest in the US) and Signature Bank (29th largest in the US) have collapsed within 2-days of each other is incredible news. As is the fact that Sterling hasn't fallen on the back of the uncertain news, as is the way generally with anything negative in terms of market sentiment. However at this stage, this news is $ sensitive, as-well-as interest rate sensitive. This means, traders do not believe that the two collapses pose a threat to the broader banking system and that current interest rate paths are a concern. Confidence is therefore negative towards the US/$ and bets on the hawkish interest rate paths of the Fed & ECB have been lowered (good news for £). The fallout will continue over the days/weeks ahead and so volatility will remain elevated over the news. For Sterling sellers, it could be a strong week with the UK Budget expecting to be positive for consumers and businesses. Any weakness shown in the ECB comments on Thursday because of the recent banking collapses will be GBP positive, as will the forecast result of tomorrows UK labour data. EUR The single currency has gained on the wounded $ and lost ground to the £ on the back of the above news. For the Euro, Thursday is crucial in terms of near-term value. A 50bp hike is almost a guarantee, but it's what the ECB says after the meet that is most important. No forward guidance on interest rates may prove negative for the € if that is to be the outcome on Thursday and the currency will likely weaken further against the Pound if, the UK Government produce a strong fiscal plan. A tough call overall this week for € sellers.. USD The Dollar is under pressure and the US/Fed have responded swiftly from the bank collapses by ordering an immediate emergency banking meeting and speech from President Biden on the situation. At this stage, Fed policy and the US banking system are both under severe fire, which is why the fallout is almost exclusively $ negative. Let's look at what happened exactly.. Both banks were heavily exposed to the cryptocurrency and technology sectors. These sectors specifically, were heavily hit in the aftermath of the pandemic and the rapid rise of interest rates in recent times have meant huge losses to their investment portfolios. The banks in question are classed as 'lender' banks, helping mainly promising tech and start-up firms. 56% of loans made from SVB were to venture capital firms (high risk/high reward) for example with 30% of loans made from Signature bank were to cryptocurrency companies. Effectively, the bets in these companies have not paid off in obviously what is a tough trading time. Poor risk management will likely be blamed for the downfall with question marks over how these loans were allowed to be made in such times. The failings of these banks represent the second and third largest bank failures in US history. Another may be just around the corner though with First Republic Bank (14th largest in the US) securing additional financing through JP Morgan last night, in case a run of their deposits occurs this week. |
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