Friday, March 17, 2023 2:46 p.m.
The third week of March proved to be a rollercoaster ride for investors around the world, with a bank rout and the specter of inflation, recession and rising living costs making their presence felt.
These themes could indeed play out in the future, so here are the five lessons we learned from the markets this week.
One: the only safe bank is the central bank
Central banks, or rather the Swiss National Bank, came to the rescue this week as banks caught a chill after the collapse of Silicon Valley Bank last week, which sparked a rout in banking stocks on both sides of Atlantic.
This week it became the turn of embattled giant Credit Suisse when its major shareholder, the Saudi National Bank, sent shares into a tailspin after saying it would inject more cash into the business. Robert Kiyosaki, author of “Rich Dad, Poor Dad”, predicted that Credit Suisse would be the next big bank failure; Kiyosaki foresaw the bankruptcy of Lehman Brothers in 2008.
Shares of Credit Suisse fell almost thirty percent to the lowest before recovering after the Swiss National Bank lent it SFr 39 billion. Susannah Streeter, head of money and markets at Hargreaves Lansdown, summed up the week’s events as a “hot mess in Europe”.
Two: the ECB only cares about inflation
William McChesney Martin, former chairman of the US Federal Reserve, said the central bank’s job was to remove the punch bowl as the party got underway. The ECB, however, seems to want to take the bowl away before the guests have even walked through the door.
The ECB raised rates by 50 basis points yesterday, surprising analysts who thought it might shy away from the turmoil of the past few days. For now, the bank thinks getting inflation under control is more important than stimulating demand with easy money or lowering the borrowing costs of big financial institutions. In a statement announcing the rate hike, the ECB said it was “closely monitoring the current market tensions” but that the eurozone banking sector was “resilient, with strong capital and liquidity positions”. .
Three: High bonds and interest = bad for insurers
London-based but Asia-focused insurer Prudential posted strong results on Wednesday, posting an 8% rise in operating profit and increasing its dividend.
Investors, however, were unimpressed, with shares down 10% from Wednesday morning. One of the reasons for this is the general sluggishness of the markets. Sophie Lund-Yates, chief equity analyst at Hargreaves Lansdown, points to Prudential’s “minimum $1 million exposure” to the collapse of Silicon Valley Bank to explain part of the fall. Another is rising rates. New venture profits fell 14%, worse than expected, after more expensive money made financing Pru’s operations more expensive.
And investors fear Pru’s bond portfolio is vulnerable now that higher rates are prompting investors to dump lower-yielding bonds in favor of products that can offer higher yields, reported. The temperature. Fears over the true value of bonds have also hit rival Phoenix insurers. After all, the Silicon Valley bank crash followed a cheap bond sellout.
Four: The End of Fossil Fuel Dominance?
The FTSE 100 is referred to as an “old economy” index, referring to its high concentration of companies operating in mature sectors like oil and gas, and its relative lack of younger companies. BP and Shell are often seen as a manifestation of this maturity.
But this week, their shares are down 9% and 10%, respectively.
Fears for the stability of the financial system and the health of the economy have driven down oil and gas prices, dragging producers down with them. Dirty fuels are still heavily involved in economic growth, but perhaps the markets expect us to need them less. Higher interest rates also make it more expensive for BP and Shell to raise capital for investment and exploration.
Five: Budgets don’t always cause chaos
Chancellor Jeremy Hunt’s spring budget was big news if you need childcare or have a big pension pot, but it made no mark on the FTSE 100.
The Chancellor announced incentive payments to attract more people into childcare, help for benefit claimants to pay for childcare and the provision of 30 hours of free childcare per week for households earning less than £100,000 a year and having children between nine months and three years old. . It also abolished the £1.073 million lifetime allowance for pensions.
From April 2024, no income tax will be paid on pension pots of any size, not just those below the newly abolished threshold. Good news for those who earn well.
The government hopes these changes will incentivize parents to work and allow professionals to work longer without fear of ending up with a pension large enough to tax. But already Labor is promising to roll back some of the planned changes.