Signs of pain with the end of the easy cash era are increasing

LONDON: The days of easy cash are over and markets are feeling the pinch with the steepest interest rate hikes in decades.

The collapse of U.S. lender Silicon Valley Bank (SVB) in early March after heavy losses in its bond portfolio as interest rates rose has led to markets that monetary tightening is likely to bring more pain. It was a warning bell.

Since the second half of 2021, the major advanced economies, including the US, Eurozone and Australia, have hiked rates by about 3,300 basis points in total.

Rate hike race https://www.reuters.com/graphics/GLOBAL-MARKETS/lbvggjjagvq/chart.png

Let’s look at some potential pressure points.

1/ bank

Banks remain at the top of the list of concerns after the SVB demise, and Credit Suisse’s forced merger with UBS has caused turmoil across the banking sector.

Investors are keeping an eye out for other banks that may have unrealized losses on government bonds whose prices have plummeted as interest rates rise.

Losses on the SVB bond portfolio have highlighted similar risks to Japanese lenders’ huge holdings of foreign bonds with unrealized losses of over ¥4 trillion ($30 billion).

Bank stocks in Japan, Europe and the US, while far from their recent lows, are still well below the levels seen just before the SVB collapse.

After SVB, bank stocks crash, underwriting banks collapse https://www.reuters.com/graphics/GLOBAL-BANKS/gdpzqkermvw/chart.png

2/Darlings No More

As the SVB collapse has shown, stress in the tech sector can quickly ripple through the economy.

Tech companies are reversing pandemic-era frenzy, with Google-owners Alphabet, Amazon and Meta implementing the latest layoffs in March after years of heavy hiring.

The housing market in U.S. tech hubs such as Seattle and San Jose has cooled faster than elsewhere, according to real estate broker Redfin.

In commercial real estate, restructuring by Pinterest causes social media company to end office leases.

Investors wary of global stress should keep an eye on Silicon Valley. Riots in Silicon Valley, a major US industry, are causing aftershocks in Europe and elsewhere.

Meta has cut almost a quarter of its workforce https://www.reuters.com/graphics/TECH-LAYOFFS/META/byprlmorqpe/graphic.jpg

3/ Default risk

Rising interest rates pose a threat to sub-investment grade companies. These companies are forced to make payments as they refinance their maturing debt and are at risk of default.

S&P expects default rates in the US and Europe to reach 3.75% and 3.25%, respectively, by September, more than double the 1.6% and 1.4% in September 2022. question” is written.

“Companies are more leveraged than they were during the Great Financial Crisis, and this cycle could ultimately focus more on corporate defaults than financials,” Deutsche Bank strategist Jim Reed said this week. I wrote.

Corporate Default Rates Could Double in 2023 https://www.reuters.com/graphics/GLOBAL-STRESS/egvbyanonpq/chart_eikon.jpg

4/ Crypto Winter

Cryptocurrencies, which benefited from an influx of cash during the easy-money era, were hurt by last year’s rise in interest rates and have rallied on recent signs that the tightening may be coming to an end soon.

Bitcoin, the most popular cryptocurrency, is an unexpected beneficiary of the widespread market turmoil, surging nearly 40% in just 10 days.

Analysts attribute the rise to market expectations that rate hikes are nearing a peak and supporting risk-sensitive assets such as Bitcoin.

But there are reasons to be careful with crypto assets. Cryptocurrency customers suffered heavy losses last year as various prominent crypto companies went bankrupt. Meanwhile, US authorities are stepping up their crackdown on the biggest players in the crypto sector.

Pain in Cryptoland https://www.reuters.com/graphics/GLOBAL-MARKETS/lgpdkjemevo/chart.png

5/ Now on sale

Due to the lag in interest rate rises, the impact on the rate-sensitive housing market has yet to be fully felt.

A Bad Loan Index compiled by law firm Weil Gotshal & Manges shows that real estate remains the worst bad debt sector in Europe and the UK.

Economists also worry that commercial real estate could be the next drop if the global banking woes trigger a widespread credit crunch in the already pressured multitrillion-dollar sector. I’m here.

U.S. commercial real estate (CRE) prices are down 4-5% from their peak in mid-2022 and are expected to drop another 18-20%, according to Capital Economics.

The sector’s reliance on loans from small and medium-sized banks, which provide about 70% of its outstanding loans to CREs, is a concern as these banks face pressure on their deposit bases, the company said. It pointed out.

Recession in Europe’s real estate sector intensifies https://www.reuters.com/graphics/GLOBAL-STRESS/znpnblgjapl/chart.png