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By J.C. Parets & All Star Charts
Friday, 10th March, 2023
1/ Silicon Valley Bank Tanks
2/ One of the Worst Weeks for KRE
3/ How Banks Make Money
4/ European Equities Remain Resilient
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1/ Silicon Valley Bank Tanks
The banking industry is coming undone. Just two days ago, Silicon Valley Bank (SIVB) let the market know it was in serious financial trouble.
Today, the market never opened for SIVB as shares plunged 63% in pre-market trading. Regulators shut down the bank, with the FDIC taking control of the bank’s deposits. Below is a price chart of SIVB as of Thursday, when the stock tanked 60%:
After SIVB lost more than half its value yesterday, fears pulsed throughout the banking system as rumors spread that investors were looking to redeem their money.
2/ One of the Worst Weeks for KRE
The state of the banking industry provides an excellent barometer of the current market environment and risk appetite. Generally speaking, as banks go, so does the market.
As you can see below, the Regional Banks ETF (KRE) tumbled for the second day in a row, posting one of its largest weekly losses in history. It fell 19.77% this week, a decline similar in magnitude to October 2008, at the height of the global financial crisis.
As such, the structural trend of this economically-sensitive group is damaged, and there could be further downside potential for this battered group of stocks if buyers don’t step in soon.
3/ How Banks Make Money
With U.S. banks under increased selling pressure this week, the following chart reveals the storm brewing beneath the surface.
The chart below shows the SPDR S&P Bank ETF (KBE) overlaid with the yield spread between the two-year and 10-year Treasury notes.
The two lines look almost identical over longer timeframes. Banks do not fare well when the shorter end of the yield curve outpaces the longer end due to their exposure to U.S. government debt, particularly in shorter durations.
Lending at higher interest rates (based on the long end of the yield curve) while paying deposits at lower interest rates (based on the short end) is how banks make money. With an inverted yield curve, the mechanism breaks down, impacting banks’ profitability.
As long as the yield curve remains inverted, banks could remain under pressure.
4/ European Equities Remain Resilient
Although U.S. equities were overwhelmed by selling pressure this week, international stocks were resilient.
The chart below shows the FTSE Milano Italia Borsa closing at its highest level since 2008.
After a decade of little to no progress, buyers have taken control, as price pierced through a critical resistance level. As long as this breakout sticks, a structural trend reversal could be underway for Italian stocks.
This is yet another piece of evidence favoring global equities over their U.S. counterparts for the foreseeable future.
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Originally posted 10th March, 2023
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