Graphic: Signs of pain as easy cash era ends are growing
30/03/2023 08:00
LONDON, March 30 (Reuters) - The easy-cash era is over
and markets are feeling the pinch from the sharpest jump in
interest rate in decades.
The collapse of U.S.-lender Silicon Valley Bank (SVB)
SIVB.0 in early March after heavy losses on its bond portfolio
as rates climbed was a wake-up call for markets that monetary
tightening will likely bring more pain.
Since late 2021, big developed economies including the
United States, euro area and Australia have raised rates by
almost 3,300 basis points collectively.
Here's a look at some potential pressure points.
1/ BANKS
Banks remain at the top of the worry list after the collapse
of SVB, as well as Credit Suisse's forced merger with UBS,
sparked turmoil across the banking sector.
Investors are alert to which other banks might be sitting on
unrealised losses in government bonds, the prices of which have
dropped sharply as rates have risen.
The SVB bond portfolio losses have highlighted similar risks
for Japanese lenders' gigantic foreign bond holdings, which
carry over 4 trillion yen ($30 billion) in unrealised losses.
Japanese, European and U.S. banks stocks, while off recent
lows, are still well below levels seen just before SVB's
collapse.
2/ DARLINGS NO MORE
As the SVB collapse showed, stress in the tech sector can
quickly ripple out across the economy.
Tech firms are reversing pandemic-era exuberance, with
Google owner Alphabet GOOGL.O , Amazon AMZN.O and Meta
META.O in March conducting their latest rounds of layoffs
after years of hiring sprees.
Housing markets in U.S. tech hubs such as Seattle and San
Jose are cooling more rapidly than in other regions, real estate
broker Redfin Corp says.
In commercial property, a restructuring by Pinterest
PINS.N will see the social media company exit office leases.
Investors wary of global stress should keep their eyes on
Silicon Valley, as ructions in this major U.S. industry cause
aftershocks in Europe and beyond.
3/ DEFAULT RISKS
Rising rates pose a threat to sub-investment grade
companies, which have to pay up when refinancing their maturing
debt and risk defaulting on it.
S&P expects U.S. and European default rates to reach 3.75%
and 3.25%, respectively by September, more than double the 1.6%
and 1.4% in September 2022. Pessimistic forecasts of 6.0% and
5.5% not "out of the question", it says.
Deutsche Bank strategist Jim Reid wrote this week that
"corporates are more levered now than during the great financial
crisis and this cycle could ultimately be more corporate default
focused versus financials."
4/ CRYPTO WINTER
Having benefited from an influx of cash during the
easy-money era, cryptocurrencies have felt pain as rates rose
last year, then gained on recent signs that tightening could end
soon.
The most popular cryptocurrency, bitcoin, has been an
unexpected beneficiary of broader market turmoil, surging around
40% in just 10 days.
Analysts attributed the gains to market expectations that
rate hikes were nearing their peak, support risk-sensitive
assets such as bitcoin BTC=BTSP .
But there are reasons for caution towards crypto assets --
the collapse of various high-profile crypto firms last year left
crypto customers shouldering large losses, while U.S.
authorities are increasingly cracking down on the crypto
sector's largest players.
5/ FOR SALE
Rising rates operate with a time lag, which means the impact
on rate-sensitive housing markets has yet to be fully felt.
A distressed debt index compiled by law firm Weil Gotshal &
Manges showed that real estate remains the most distressed
sector by some margin in Europe and the UK.
Economists are also worried that commercial property could
be the next shoe to drop if global banking woes trigger a
broader credit crunch for the multi-trillion-dollar sector that
was already under pressure.
Capital Economics said that U.S. commercial real estate
(CRE) prices have fallen by 4-5% from their peak in mid-2022 and
expects a further 18-20% drop.
The reliance of the sector on lending from small and
mid-tier banks -- which provide about 70% of outstanding loans
to CRE -- is worrisome as those banks are facing pressure on
their deposit base, the firm noted.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Pain in crypto land https://tmsnrt.rs/3zi76a0
Distress in Europe's real estate sector rises https://tmsnrt.rs/3lU02xy
Corporate default rate may double in 2023 https://tmsnrt.rs/3Jmx8zd
The race to raise rates https://tmsnrt.rs/3ncfxRI
Meta has cut nearly a quarter of its employees https://tmsnrt.rs/3Z250WB
Bank stocks tumble after SVB, Signature Bank collapse https://tmsnrt.rs/3JKHqYC
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(Reporting by Yoruk Bahceli, Chiara Elisei, Nell Mackenzie,
Dhara Ranasinghe, Naomi Rovnick, Elizabeth Howcroft; Compiled by
Chiara Elisei; Graphics by Kripa Jayaram and Vincent Flasseur;
Editing by Dhara Ranasinghe and Andrea Ricci)
((Chiara.Elisei@thomsonreuters.com;))