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Tuesday, March 28, 2023

The 5 keys to understanding what happens in financial markets and its local impact

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He US banking sector had its worst fall in three years last Friday. Uncertainty about the sustainability of the banks after the collapse of the two major banks had a strong impact on the financial markets. Almost a week after the event, what is happening and what impact does it have in Argentina.

1. Bank collapse

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The first to collapse was Silvergate Capital, a bank founded in 1998 that in 2013 focused its business on crypto and blockchain services. Its activity was punctuated by the bankruptcy of the FTX platform last year. It filed for bankruptcy and announced the reduction of operations. This bankruptcy was motivated by a typical run on the bank’s deposits.

The second event that continued the crisis was the bankruptcy of Silicon Valley Bank, a very important bank (the 16th largest in the US). Its activity is based on providing financing to startups. Its shares fell 60% in just one day and the American State had to take control of the bank. Since then, an investigation has been carried out by the US justice system and the SEC.

The third bank that found itself at a crossroads was Credit Suisse, which recognized in its 2022 annual report a “material weakness” in the control of financial information. Since then, and in the midst of the crisis of confidence towards the banks, Credit collapsed. But it was not the only thing: then it was revealed that one of the most important banks in Switzerland also had liquidity problems. Therefore, the last thing that is known is that the Swiss Central Bank came to the rescue for US $ 54,000 million to avoid bankruptcy.

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Finally, the fourth bank that is in everyone’s sights is the First Republic Bank which is hanging by a thread and is being analyzed, according to Bloomberg, the possibility of it being sold directly due to the inability to sustain liquidity. First Republic secured additional funding through JPMorgan Chase & Co and the Federal Reserve on Sunday, giving it access to a total of $70 billion in funds from various sources to deal with deposit outflows. However, it seems not to have been enough and the shares plummeted again this Thursday.

2. Contagion effect in Europe of the crisis

With the bankruptcy or health problems of these banks, economists began to warn that the main cause of what is happening in the financial sector is the rise in interest rates by the Fed. The industry bought securities with low yields and, at the same time, raise the rate, they lost a lot of money in 2022.

On Wednesday, the “contagion effect” that was expected to arrive reached the European banks, which managed to infect the stock markets. This was due to Credit Suisse’s announcement that it will not invest any more, which began to alarm investors about the sustainability of the sector. This is how some stock markets such as the IBEX hit lows and sank to 4%.

This Thursday, despite the fact that uncertainty continues, the ECB decided to raise the rate by 50 basis points, concerned about inflation that is far from meeting targets. At the same time, the authorities stressed that “the collapse of the US bank Silicon Valley Bank (SVB) does not represent a “significant risk” of contagion for the banking markets of Europe.”

3. The role of emerging markets

Recently, it was revealed that the collapse of Silicon Valley Bank affected about 14 Argentine entrepreneurs and local SMEs. Basically because Silicon Valley financed the majority of the startups. However, it soon became clear that these entrepreneurs managed to withdraw their funds.

In the midst of the crisis, dollar sovereign bonds and local currency debt in emerging markets rose strongly and presented an opportunity.

The collapse of Silicon Valley Bank has raised concerns about the stability of the US financial system and raised the likelihood of recession in the world’s largest economy, prompting a sharp reduction in bets on interest rate hikes by from the Federal Reserve. The two-year Treasury yield posted the biggest drop in four decades on Monday as investors scrambled for safe haven.

“The saving grace for emerging local markets is that real rates are high, which provides a cushion for emerging market currencies and, aside from external volatility, EM fundamentals are in good shape,” Bloomberg analysts said. “Emerging market central banks are closer to the rate cap than the ECB and Fed, suggesting that real rates are attractive going forward.”

4. How it impacted Argentina

In a weakened Argentina like ours but without access to international markets, the collapse of Silicon Valley Bank affected Argentine paper listed in New York and sovereign bonds in dollars initially due to global uncertainty. However, in the long term it may be an opportunity: if the Fed decides to stop raising interest rates – as analysts expect to happen – investors could include risky titles such as Argentine ones, whose first impact would be a rise in bonds. global.

The Fed will decide on Tuesday March 22 whether or not to raise rates. At that time, the impact in Argentina can be observed. However, this fear of transferring the financial crisis to the real economy tends to have an impact on commodities, as was the case with oil. This generates a drop in oil shares, as is the case of YPF.

5. How the dollar can react to the financial crisis

When there is global uncertainty, Argentine bonds are seen as risky and that is why they are sold. This is the reason for the falls in recent days, despite the fact that dollar bonds have not been performing well in February or in March. However, this search for safer assets may have an impact on the price of the dollar: the unwinding of positions in pesos may generate tensions in the exchange market. However, the rise in financial dollars seems to be part of the local microclimate in which the dollars remained stable in February and are seeking a readjustment in March pending the forthcoming decisions of the Ministry of Economy.

Source: Ambito

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