Markets Update March 2023 - New cracks in the financial system weigh on the markets

The collapse of the U.S. Silicon Valley Bank (SVB) and the crash of Credit Suisse shares bring back dark memories of the great financial crisis 15 years ago. On the surface, the bankruptcy of SVB has little to do with the problems of the traditional Swiss bank. But the events show that the banking and financial system is increasingly suffering from the sharp tightening of monetary policy. After all, the Fed has raised its key interest rate by 450 basis points in just 12 months, the steepest rise in interest rates in the last 40 years. It is not surprising that SVB, a bank that specialized in financing start-up and technology companies, is now the first to succumb to the pressure. After all, these industries are considered to be particularly sensitive to interest rates.

Capital markets at a crossroads

The bank quake is currently presenting the central banks with a dilemma that is almost impossible to solve. The latest inflation data for the euro zone and the U.S.A. show that price pressures remain high and threaten to become entrenched. This calls for a consistent continuation of monetary tightening, as this is the only way to achieve the goal of price stability. On the other hand, this increases the interest rate pressure on the financial system. A monetary policy "business as usual" could therefore lead to undesirable distortions, making a major financial crisis more likely. Central banks are trying to solve this dilemma by raising key interest rates while at the same time providing targeted liquidity. This may relieve the pressure temporarily, but it cannot work in the long run. The financial markets know this and are already speculating that the central banks will ultimately be forced to moderate or even reverse their tightening course in the course of the year. Whether this will actually happen remains to be seen. In any case, the financial system is likely to face a number of stress tests in the coming months. Further negative surprises cannot be ruled out. Professional investors should respond to this challenging investment environment by dynamically managing their risk exposure.