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Investors focus on banking sector

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 17 March 2023.

| 6 min read

Fears of a banking crisis dominated the week but appeared to ease on Friday. Following the failure of two US banks in the past week – Silicon Valley Bank (SVB) and Signature Bank – investors were worried that other banks could also be about to collapse. This led to concerns about another US regional bank, First Republic, and European bank Credit Suisse, which has been experiencing difficulties for some time.

US regulators stepped in to ensure that customers at SVB and Signature Bank had full access to their money. The Swiss central bank has moved to support Credit Suisse and a group of US banking giants stepped in to rescue First Republic.

The wobble in the banking industry is likely to result in the Federal Reserve easing off on its interest-rate increases. Against this background a 50-basis-point rise in US interest rates at the next meeting seems unlikely.

Troubles in the banking sector overshadowed Chancellor Jeremy Hunt’s spring Budget statement, which introduced incentives for high-growth businesses, such as those involved in artificial intelligence and quantum computing. There were some significant changes to pensions aimed at encouraging older workers back into employment.

Over the week, the blue-chip FTSE-100 index was down 3.2% by mid-session on Friday, with the more UK-focused FTSE 250 2.4% lower.

Ukraine

Chinese President Xi Jinping will travel to Russia next week to hold talks with President Vladimir Putin, as Beijing touts a plan to end the grinding Ukraine war that has received a lukewarm welcome on both sides. Last month, China published a 12-point plan for "a political resolution of the Ukraine crisis" and after a senior Chinese diplomat called on Thursday for negotiations in a call with Ukraine's foreign minister.

Banking sector issues

There have been a series of issues with banks on both sides of the Atlantic. Regulators and central banks have stepped in to shore up the system, which remains well capitalised. Silicon Valley Bank and Signature Bank collapsed in the US. Although the issues at these banks are serious, it’s important to say that we are a long way from a full-blown crisis. Central banks have reassured savers about their money.

Swiss bank Credit Suisse was forced to secure an emergency central bank loan of up to $54 billion to shore up its liquidity. There have been a longstanding set of problems at Credit Suisse, but fears were brought to ahead and its shares slumped 24.5% in a day.

A $30 billion lifeline for First Republic Bank by major US banks eased market fears on Thursday, but whilst the bank’s shares closed 10% higher following news of the rescue, they fell 17% in after-market trading after the bank said it would suspend its dividend and disclosed its cash position and just how much emergency liquidity it needed.

What caused the collapse of Silicon Valley Bank?

What are the implications of the collapse of these banks?

Budget

Britain's economy is forecast to avoid a recession in 2023, but living standards are still set to record their biggest two-year fall in seven decades, while the tax burden also increases for millions of people, the Office for Budgetary Responsibility (OBR) said.

Real household disposable income (RHDI) per person – a measure of real living standards – is expected to fall by a cumulative 5.7% over this financial year and 2023-24, the OBR said in its fiscal outlook published alongside the spring Budget delivered by the government. The spring Budget was a busy one from a personal finance perspective. Chancellor of the Exchequer, Jeremy Hunt, set out a variety of measures aimed at tempting people back into work to boost Britain's economy and some significant reforms of childcare, energy and fuel duty. There were major changes to pensions.

Economics

The European Central Bank (ECB) went ahead and raised short-term interest rates by 50 basis points, despite recent heightened stress in the banking sector on either side of the Atlantic. In its policy statement, the ECB said the move was in line with its goal of a "timely return" of inflation to its 2.0% medium-term target. However, in her post-meeting press conference, ECB chief Christine Lagarde said that the path that lay ahead for policy could not be determined and was data dependent.

How are emerging markets faring?

Geopolitics

Chinese-owned company TikTok has said it is “disappointed” by the UK government’s decision to ban the social media app on MPs’ phones. The social media video app, owned by Bytedance, has been at the centre of security and data protection concerns in recent weeks – with Cabinet Office minister Oliver Dowden announcing the decision in parliament this week.

Corporate news

DFS Furniture issued a profit warning alongside its interim results. The company cut its annual profits expectations due to a slowdown in order intake. Profits in the first six months of the year fell as discretionary spending was hit by the cost-of-living crisis.

Electronics giant Samsung plans to invest around £190bn over 20 years in the South Korean government's push to develop a mega semiconductor hub in the country. Samsung is the world's biggest maker of memory chips, smartphones and TVs.

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Investors focus on banking sector

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