Walker Crips' Market Commentary
Central banks' race to reassure equity markets after collapse of Silicon Valley Bank
It was always going to take a big news story to divert the attention of equity markets away from hanging on every word that Jerome Powell (Chair of the US Federal Reserve, "Fed") utters about inflation and the likely path of interest rates. The sudden collapse of Silicon Valley Bank ("SVB") proved to be just the story. To put it simply, the Fed's policy of aggressively raising interest rates has had the effect of pushing borrowing costs to a level above where many cash-hungry start-up companies can sustainably raise finance. At the same time, those very same high interest rates feed into (and have a negative effect on) the discounted cash flow valuations which are commonly used to value unprofitable start-up companies - the result being to effectively starve them of the opportunity to raise equity finance. So, choked of all forms of finance, their only option had been to draw upon cash reserves held with the likes of SVB. As cash calls gathered pace, SVB had to liquidate some of its "low risk" capital (i.e. US Treasuries) much earlier than it had expected it would need to. Due to the rate hiking over the past year, those “low risk” Treasuries were not worth nearly as much as they had been 12 months prior - and so SVB faced a cash shortfall, which it tried to plug via a hastily arranged equity fund-raising. If there is one thing guaranteed to cause panic amongst investors and savers alike, it is a bank that admits it cannot meet customer redemption requests...
Direct Line, Legal & General and Robert Walters
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