ASX 200 dives 2.3 per cent as regional bank jitters hit the US

Australia’s share market plunged by more than 2 per cent in its biggest fall since September as the potential collapse of a US regional bank sparks panic in the banking sector.

The Australian sharemarket has dived to a two-month low as financial strife at a small US bank caused outsized falls in the US share market. (Photo by Bryan R. Smith / AFP)

Contagion effects from a potential collapse of a US regional bank, SVB, spilled over to the Australian share market on Friday, sparking its biggest one-day fall in six months.

The S&P/ASX 200 index closed down 166.4 points or 2.3 per cent at 7144.7 points after hitting a two-month low of 7134.5. The energy, materials and financial sectors underperformed.

Big banks did much of the damage, with CBA down 3.3 per cent, NAB off 3 per cent, and Westpac and ANZ both falling 2.6 per cent. Woodside lost 3.5 per cent and BHP dropped 3.4 per cent.

The selloff began with a 60 per cent share price plunge in Silicon Valley Bank owner – SVB Financial Group.

The tech-focussed lender sought $US2.25bn ($3.26bn) in equity – over a third of its market capitalisation – after reporting a $US2bn loss as it was forced to sell some of its US Treasury bond following a larger than expected fall in deposits. US Treasuries prices have plunged in the past year.

That pushed the closely-watched S&P SPDR Regional Banking ETF down 8.1 per cent in a selloff that also spilled over to larger banks. The KBW Bank index fell 6.1 per cent, with J.P. Morgan down 5.4 per cent, Citigroup down 4.1 per cent and both Bank of America and Wells Fargo slipping 6.2 per cent.

The S&P 500 fell 1.9 per cent to a seven-week low of 3918.3 points as SVB fell 22 per cent in after-hours trading, sending S&P 500 futures down 0.7 per cent.

SVB chief executive Greg Becker held a call Thursday trying to reassure customers about the bank’s financial health, according to people familiar with the matter, urging them not to pull their deposits from the bank and not to spread fear or panic about its situation.

Heightening concerns about potential contagion effects, Pershing Square founder Bill Ackman warned that the “risk of failure and deposit losses” could spill over to the “next, least well-capitalised bank” causing other “dominoes” to fall.

“That is why government intervention should be considered,” Mr Ackman wrote on Twitter.

A failure of SBV “could destroy an important long-term driver of the economy, as venture capital-backed companies rely on SVB for loans and holding their operating cash.”

“If private capital can’t provide a solution, a highly dilutive government preferred bailout should be considered,” Mr Ackman said.

Pepperstone’s Head of Research, Chris Weston, warned that Bill Ackman’s words carried weight.

“When Bill Ackman says, if needed they should get a government bailout, I suggest this would be systematic if not dealt with,” Mr Weston said.

Some venture-capital investors advised start-ups to pull their money out of SVB, citing liquidity concerns, the Wall Street Journal reported, citing people familiar with the matter.

Bloomberg said Coatue, USV and Founder Collective told clients to pull funds from SVB.

“Credit has been well contained through the hiking cycle, but if credit spreads widen, equity markets will get chopped up and contagion would be the dirty word everyone uses,” Mr Weston added.

MST Senior Analyst Hasan Tevfik predicted SVB “will be the next step of the growth stock de-rating.”

“The banks that we know are pretty well capitalised and this has been the case since the financial crisis, so the secondary effects here should be limited,” Mr Tevfik said.

“However, the contagion will be in the tech-financing-system.”

“Expect venture capital valuations to come down and with it, listed tech stock valuations – growth stocks still appear too expensive and vulnerable when capital leaves the asset class.”

Barrenjoey’s Head of global macro strategy, Damien Boey, said while SVB is “not a systemic event by itself” it’s a reminder that rising interest rates have “real effects on the economy and markets.”

“Risk pricing had become complacent because we hadn’t seen much impact to date from tightening interest rates, but now investors have to re-assess.”

Mr Boey said that investors will need to monitor the recent trend of increasingly large zero-days-to-expiry options, which have generated downside volatility via delta hedging in recent weeks.

“If a critical mass of these get triggered by sharp market movements, we could see them have an explosive impact on volatility, rather than a dampening effect,” he said.

The CBoE VIX Volatility index surged 3.5 percentage points to a multi-week high of 22.6 per cent.

Sustained higher volatility would reduce the amount of shares some investors can hold.

Credit spreads will also be key as a spike in the VIX would widen credit spreads, potentially putting some corporate borrowers into difficulty, Mr Boey warned.

Particularly in commercial real estate, funding conditions are already tight.

“SVB is a small bank (but) if we see more deposit flight from small banks, liquidity issues could emerge, not because there isn’t enough liquidity in aggregate, but because of distributional issues,” said Barrenjoey’s Boey. “Because credit and equity risk premia are on the rise, the bond-equity correlation breaks, and investors need to think about how to defend against this.”

The St. Louis Fed warned in February that while rising interest rates give banks opportunities to increase earnings by pushing up rates charged on loans, they also could increase the cost of liabilities and decrease the value of investment securities held as assets.

“Even unrealised losses—paper losses—in investment portfolios can have negative effects on liquidity and present funding challenges, earnings pressures and, in some cases, issues with capital,” said St. Louis Fed senior vice president, Carl White.

It came as global markets awaited Friday’s release of US non-farm payrolls data for February.

In light of hawkish comments from Federal Reserve Chairman Jerome Powell this week, stronger than expected US non-farm payrolls data could determine whether the Fed hikes rates by 25 points this month or reaccelerates the pace of tightening to 50 basis points.

Consensus estimates are for a 225,000 rise in jobs and a 3.4 per cent unemployment rate.