3rd May 2023
Mixed messages for investors
Investors received good and bad news last week, as strong earnings from a number of large companies stood in contrast to the failure of another US bank.
First Republic Bank became the second largest bank to fail in US history, as well as the third bank to collapse since March, hot on the heels of Silicon Valley Bank and Signature Bank. JPMorgan Chase has agreed to buy First Republic’s assets and deposits, which may mitigate some of the wider harm that could have resulted from the bank’s failure.
Unsurprisingly, local US banks are now facing mounting pressure. The increasing interest rates over the past year – although helpful in tempering inflation – have added to the strain on borrowers. The recent bank failures in such a short period of time have also made investors and savers nervous about smaller US banks. A significant drop in deposits following the downfall of SVB was part of the problem for First Republic.
That said, Mark Dowding of BlueBay suggests that the root of First Republic’s issues was a mismatch between the maturity of assets and liabilities, leaving the bank vulnerable. However, he says:
“We would note that, generally speaking, banks are in a healthy position and are supported by solid interest margins and a relatively benign backdrop for credit quality. From that standpoint, it may be that issues pertaining to a small number of institutions need to be resolved, but we would disagree with any notion that we are witnessing developments which are more broadly systemic, in the way we observed with the Great Financial Crisis in 2008.”
Considering these difficulties, many experts are predicting that tougher rules will be implemented in response.
Other banks deliver strong results
Despite these pressures and failures, other large banks and financial institutions posted strong results last week, including Deutsche Bank, Barclays and Santander.
Eoin Walsh, Partner at TwentyFour Asset Management, noted:
“One of the more pleasing aspects of the earnings is that many of the banks did well because of increasing net interest margins, driven by higher rates – taking deposits and lending being the bread-and-butter business for most banks. Net interest income is stable and repeatable, which is why it is so important.”
Given the recent failure of Credit Suisse, strong results from its European peers will have buoyed investors.
The Fed’s meeting agenda plays out
Positive outcomes were not confined to banks and financial markets, however. Several large US technology companies reported strong earnings that boosted the tech-heavy NASDAQ by 1.28%. Despite the issues with First Republic Bank, the S&P 500 managed to record positive numbers for the week. The full effects of the bank’s failure and subsequent acquisition by JPMorgan Chase may be felt in the coming days, as the events occurred towards the end of the previous week and the beginning of this week.
Recent events will have given the Federal Reserve much to ponder ahead of this week’s monetary policy meeting. A 0.25% increase in rates has long been expected, but markets will be keen to gain any clues on where the Fed will go from here.
Local elections unlikely to move UK economy
In the UK, the FTSE 100 fell marginally due to economic concerns. Local elections are scheduled for later this week, and political leaders are currently releasing soundbites to try and improve their positions. Although locals will no doubt be keeping a keen eye on the results, Martin Walker, Invesco Head of UK Equities, suggests these elections may not hold much of note from an investment point of view:
“The outcome of the May election in Barnsley will have no discernible effect on the prospects for AstraZeneca’s world-leading immuno-oncology pipeline; the size of the swing in North Tyneside will not affect sales of Unilever in Indonesia. Yet together, these two companies alone comprise almost 12% of the FTSE All-Share Index.”