Summary:
The collapse of the Silicon Valley Bank stems from the Federal Reserve’s aggressive tightening. High interest rates give negative impact on more sectors, such as the technology industry.
On March 11, David Barret, EBC Financial Group CEO, was invited by China Business News to have an in-depth discussion on the impact of the incident on the market environment.
The Silicon Valley Bank Incident really caught the market off guard. What is your opinion on this?
David Barrett: The market was caught off guard, but it’s caused by the poor regulation in the US and the side effect of the US interest rate hikes. The problem in the US is that Silicon Valley Bank are considered community banks, hence their business activities are not as well-regulated as any other larger banks like JPMorgan Chase.
The market is afraid that more similar incidents will occur in the US banking industry due to large number of people entering Silicon Valley through virtual currencies, and their huge amount of savings that exceed the protection limit that they can obtain from The Federal Deposit Insurance Corporation (FDIC).
We won’t see Silicon Valley Banks being bailed out anytime soon. Several large banks in the US will make an offer to acquire Silicon Valley Bank, but I am not sure whether it is feasible. If this does not happen, the FDIC will think of a way to respond, but the scale will be limited. For the other banks, they all may be in trouble to runs in which causes greater crisis.
This is a very serious issue for the market. They have realized the side effects of raising interest rates yet have not done anything to fix it.
Gold had a good performance last week due to risk-off factors, will it continue higher?
David Barrett: In my opinion, gold acts as a safe haven during the market turbulence, so it did well last week, especially after the Silicon Valley collapse causing investors to be invested into it. However, the gold trend is highly correlated to the US dollar. Because the US dollar index is expected to remain positive overall. Considering the rise of the US dollar in the short term, I do not think that the rise of gold in the past few weeks will sustain. As I said, the US dollar will remain strong and can be reflected on the gold performance. The only thing to note is that if the Silicon Valley incident occurs, gold will definitely perform better in the short term, but we should be confident that the US dollar will do the same.
Are there any asset allocation opportunities amid the volatile market environment?
David Barrett: If we look from the downside, I mentioned it previously that the first half of the year will be very tough for tech stock, and it remained the same. The impact of the high-interest rates on highly leveraged industries will continue, hence all these industries will not bring any outstanding performance.
Conclusion: the Federal Reserve’s continued interest rate hikes has rippled through markets. The US labour market is still overheated, underpinning higher for longer interest rates. The Silicon Valley Bank incident sounds alarm over financial risks amid monetary tightening. Therefore, the Fed has to tread more cautiously on inflation fight.
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