26th April 2023

Cappuccino Commentary

A relaxed read on the issues of the day

Markets returns were mixed in March with global equities finishing lower while bond markets generated gains over the month.  There was considerable intra-month volatility as banking contagion fears emerged in both the US and Europe over the period.    First, we witnessed the collapse of Silicon Valley Bank (SVB) in the US which was followed by the forced takeover of Credit Suisse (CS) by UBS.  SVB was the 16th largest bank in the US although is widely viewed as an outlier within the banking sector given 1) its concentrated client base lending predominantly to technology and venture capital startup firms 2) its rapid growth and aggressive balance sheet management style and 3) poor interest rate hedging policies.   The following week, CS had to be rescued after also experiencing a bank run.   Similar to SVB, CS also appears to be a unique situation where the company had a reputation for being ‘accident prone’ and a record of run-ins with financial regulators.  Both events resulted in a sell-off across the financials sector however rapid action by central banks and regulators appears to have stemmed contagion fears, at least for the time being.

Within equities, regional returns were somewhat mixed over the period.  From a style perspective, growth outperformed value stocks as yields fell and financial stocks weighed more heavily on value indices.  Japan and Emerging Markets were the best performing regions returning 1.9% and 0.7% respectively.  Japan benefitted from outperformance in some tech related names while the Emerging Markets posted a modest gain as further data points of a Chinese recovery becomes more evident.  In contrast, UK equities fell -2.9% in March because of the index’s sizeable exposure to financial and energy stocks which fell over the period.   Despite market returns, economic growth in both UK and European economies has fared better than projected with manufacturing and service activity (PMI’s) improving to expansionary levels.

Bond markets rallied sharply in March as investors sought safe havens from the banking sector crisis and future interest rate cuts were priced in.  Bond yields fell sharply following the turmoil in the banking sector based on the view that central banks may be more likely to loosen monetary conditions to avoid further stress in the financial system.   To put the magnitude of these moves into perspective, US 10-Year yields fell from a high of 4.09% to a low 3.29% while UK 10-Year moved from 3.91% to 3.16% during the month (both peak to trough). In addition, there is a growing belief recent stresses in the financial sector could lead to banks becoming more risk adverse, which could affect economic activity and result in a more deflationary environment.  Based on these factors, there were strong gains generated across government, investment grade and high yield bond markets.

Commodities were generally weaker over the month largely due to weakness in oil prices which hit 52-week lows.  Oil prices fell on concerns of global recession despite geopolitical tensions.  Conversely, gold rallied 6.1% as a ‘safe haven’ asset amidst the banking turmoil.


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