The US market’s three main stock indices fell between 1% and 2% on Friday in response to the news of SVB’s collapse and a resilient American jobs market. The weakness could rub off on Dalal Street on Monday morning as foreign investors may step up selling on local stocks in a flight to safer assets. The Sensex and Nifty have fallen over 2% in the past two trading sessions mainly led by domestic banks.
Market participants said the impact of the crisis in SVB on India seems to be indirect so far. The concerns are more around the impact on sentiment that these events could have on local equities, which is already out of favour for now on account of rich valuations and slowing corporate earnings.
US regulators on Friday shut down SVB, in what is the largest failure among American banks since the global crisis when Lehman Brothers had to wind up. SVB’s collapse has left investors fretting which could be the next one.
“The big question is how widespread the angst is?” said ING’s senior rate strategists Antonie Bouvet and Benjamin Schroeder in a note.
Wall Street commentators said in the wake of the SVB closure, several small banks that have been below the regulators’ radar remain vulnerable.
SVB’s collapse is a textbook case of Asset-Liability Mismatch – where lenders use short-term hot money to lock in money long term. With depositors fast pulling money out of the bank, it was trapped with several loss-making bonds and few liquid papers. This is reminiscent of what happened to the Indian mutual fund industry soon after the IL&FS crisis when various debt schemes invested short-term money into illiquid papers.JP Morgan’s analysts said the liquidity concerns are specific to smaller banks.
The SVB fiasco is only a distraction from the original issue that is worrying investors: inflation. The US economy added more jobs than expected and the unemployment rate was higher, raising expectations that the Fed might have to increase interest rates by 50 basis points. Till last year, even the most hawkish of Wall Street money managers anticipated the US Fed’s interest rate increases to end at 5-5.5%. Now, such expectations have been raised even higher to 6%.
That is bad news for emerging markets, including India. The question that market participants are asking is why would a foreign investor earning 6% in the world’s safest financial instrument look at expensively-valued stocks in India.
That said, the fallout of a prolonged period of higher interest rates may unfold across developed markets in the coming months. Investors will watch the structured deal space in the US private market especially by private equity and hedge funds even more closely to assess the stress in the financial system.