ASX’s weekly losing streak is its worst since the global financial crisis

After rising almost 10 per cent from its early January low on the back of China reopening, the local index has fallen 8 per cent in the past seven weeks.

The ASX 200 has suffered from its exposure to banks and other companies linked to the economic cycle.

Australian shares have staged their longest weekly losing streak since the global financial crisis in 2008 as the US banking crisis spread to Europe with Swiss regulators forcing long-troubled investment bank Credit Suisse to merge with larger rival UBS.

A 0.6 per cent fall in the S&P/ASX 200 index to 6955.2 points marked its seventh consecutive weekly fall.

After rising almost 10 per cent from its early January low amid investor optimism about China’s economic reopening after Covid-19 lockdowns, the local index has fallen 8 per cent in the past seven weeks.

It hit a four-month low of 6895 points on Monday.

Property, banks, technology and industrials led declines.

While Australia’s banks are well capitalised and the crisis has centred on US regional banks and Credit Suisse, the S&P/ASX 200 has suffered from its relatively high exposure to banks and other companies linked to the economic cycle.

The banks index is down 12 per cent in seven weeks.

The market also has less exposure to growth stocks that rebounded strongly in the past two weeks amid a massive repricing of central bank expectations from rate rises to cuts this year.

The Nasdaq Composite index, having fallen more than 10 per cent from its peak in early February to a trough in mid March, has rebounded as much as 9 per cent.

As has been the case since the collapse of Silicon Valley Bank two weeks ago, the past week was marked by sustained pressure on regional US banks.

That spilt over to the broader sharemarket and other risk ­assets, prompting regulatory action to deal with Credit Suisse.

Swiss regulators created uncertainty by wiping out the value of hybrid AT1 bail-in bonds issued by Credit Suisse.

However, EU authorities have stated that bail-in bonds would rank ahead of equity in the EU.

There was also no breakthrough on broader regulatory actions reportedly being considered.

Those included a JPMorgan-led push to rescue struggling First Republic Bank, blanket federal insurance for US bank deposits, and a potential solution involving Warren Buffett.

US Treasury Secretary Janet Yellen said on Wednesday that blanket US bank deposit insurance was not being considered.

But on Thursday she clarified her stance, saying a drastic extension of insurance wasn’t needed, but the US “certainly would be “prepared to take additional actions if warranted”.

Meanwhile, central banks in the US, Britain, Switzerland, Norway, The Philippines and Taiwan continued to lift their monetary policy interest rates, as the European Central Bank did the previous week.

But while maintaining that more tightening was needed, the Fed’s outlook in particular was cautious.

Citi’s global macro strategists say it’s too soon to know if confidence in US bank deposits can be regained without blanket federal insurance, saying it was “by no means certain” that authorities will restore confidence with respect to bank deposits.

They warn of a potential feedback loop of deposit outflows causing lower bank shares, leading to more outflows. First Republic Bank and Pac West Bancorp recorded sharp falls this week.

“At this stage it is too early to tell whether confidence can be regained without a formal broad insurance of deposits,” they said.

AMP Capital head of investment strategy and chief economist Shane Oliver. Picture: Jane Dempster

They also noted that tightening credit conditions had increased the risk of a US recession.

With credit conditions tightening and a US recession “bank on the agenda”, they see US equities as “vulnerable, having priced in a soft or even a no landing since the lows from last October”.

“If the banking problems should persist, we believe the downside would be very mat­erial,” they said.

“We therefore remain underweight US equities.”

AMP Capital head of investment strategy and chief economist Shane Oliver said the risk of further contagion continued to be high in the short term, particularly as rate rises and last year’s surge in bond yields continued to feed through to other sectors of the economy.

Office property was “particularly vulnerable” to the negative valuation impact of higher bond yields and reduced space demand from “work from home”, which in turn would have an impact on banks.

“The Fed tightening is unprecedented for a financial crisis,” Dr Oliver said. “It does seem like central banks are determined to show that they have financial stability measures to deal with financial stability issues and so monetary policy is still free to deal with ­inflation.”

The turmoil implied a hit to growth, as a result of increased bank funding costs and reduced lending, which could knock about 0.5 percentage points from GDP in the US and Europe, hitting profits.

Dr Oliver said the fallout from the monetary tightening of the past year “still has a way to go”, including in terms of the impact on banks, so volatility in sharemarkets was “likely to remain high for a while yet”.

On a positive note, Citi’s US chief economist, Andrew Hollenhorst, said the US bank deposit “flight” issues “remain relatively localised, contained and manageable”. Based on the Fed’s balance sheet as of March 22, he found that the Fed’s lending to banks had risen only $US17bn ($25bn) in the past week, and it had been almost entirely credit extended to the failed banks.

In the previous weekly period ending March 15, Fed lending to US banks surged $US300bn.

“That suggests active banks are able to manage any deposit outflows without sourcing new Fed liquidity,” Mr Hollenhorst said.