Markets were lower Friday after the failure of Silicon Valley Bank, a lender to start-up companies and venture capital firms.
After a volatile week for the regional bank, SVB was ultimately not able to raise capital to boost its finances, causing regulators to take possession of the bank.
As a result, stocks across sectors moved lower, alongside U.S. Treasury yields.
The 2-year Treasury yield was down more than 0.30 percent Friday, to around 4.6 percent, well below the 5.0 percent range seen earlier this week.
The downward pressure on yields comes as uncertainty around higher-rate induced volatility and a potential economic slowdown rises, with investors perhaps flocking to Treasuries as a more traditional safe-haven asset.
The VIX volatility index, also known as the Wall Street fear index moved higher as well, up about 15 percent on Friday to about 26.
The big driver of volatility over the past several days has been the ongoing uncertainty and ultimate failure of SVB, a lender to early-stage companies in technology and healthcare.
On Friday morning it was confirmed that SVB was shut down by California regulators after its attempt to raise capital failed.
The news comes the same week as Silvergate Capital, a bank heavily tied to cryptocurrencey, also announced it is shutting down.
These events have weighed heavily on the banking sector, with the KBW bank index down around 16 percent this week, and large bank stocks including J.P. Morgan, Bank of America and Citibank all down about 7-10 percent on the week.
However while the news of SVB is worrisome, particularly as rising interest rates have put downward pressure on valuations of equity and bond prices the potential for broader disruption to the U.S. or global financial system appears contained.
SVB for example, had about $200 billion in domestic assets, versus the $19.8 trillion in the overall U.S. banking system – putting it at about 1 percent of the system overall.
Larger banks in the U.S. financial system have more diversified revenue streams, have seen an increase in regulation, and have healthier balance sheets since the last big crisis – the great financial crisis back in 2008.
In fact, over the past few quarters, we have seen big banks increase reserves in order to cover potential loan losses, which provides additional security for th banking system overall .
According to analysts, while there may be idiosyncratic disruptions and even isolated failures in some higher-risk or small institutions, the overall U.S. banking system remains very well capitalized, limiting the potential for a more systemic banking system problem.
The nonfarm payrolls report for the month of February indicated that 311,000 jobs were added last month, well above the expectation of 215,000 jobs added.
This again demonstrates the strength of the labor market and supports a reliant consumer and household demand.
The much-anticipated wage growth figure came in at 4.6 percent year-over-year, slightly below the expectation of 4.6 percent, but higher than last month’s 4.4 percent wage growth.
The Fed has indicated that it would like to see wage growth fall to the 3.5 percent range in order to be in-line with its overall 2.0 inflation target.
Overall, this month’s solid jobs report continues to keep the Fed on track with its ongoing rate hikes, particularly given there has been no notable relief on wage pressures.
However, given uncertainty in the financial markets has risen appreciably, markets now expect a 0.25 percent rae hike in March versus the expectation of 0.50 percent just earlier in the day.
Next week’s CPI and PPI inflation reports maybe the final – and critical – disappoints that will help determine the Fed’s rate-hiking decision at its March FOMC meeting.
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