EBC Group says dollar still weighs on gold despite SVB failure

March 18 02:12 2023

The Fed has managed to restore the confidence in the financial sector with its new lending programme to prevent wider systematic fallout, but the second biggest bank crash in U.S. history will likely continue to bite.

The growing concerns that the most aggressive tightening in decades will backfire just add to uncertainties around markets which already saw wild swings. We are watching out for signs of whether SVB is just the tip of the iceberg.

EBC Group says dollar still weighs on gold despite SVB failure

Liquidity crisis underway

SBV was dumping its $21 billion bond portfolio yielding an average of 1.79%, well below the Treasury yield of 5%, recording a total loss of $1.8 billion. The questionable sell-off sparked the exodus of deposits and then banking turbulence.

Actually SVB, one of the top 20 U.S. banks, reveals a liquidity problem under the carpet. Surprisingly the liquidity ratios of First Republic Bank, Western Alliance and PacWest are even outstripped by that of SVB. First Republic is the worst among them with a dire 4%.

Fed in dilemma  

The bond portfolio liquidated merely accounts for 23% of SVB’s liquid assets, with more securities classified as ‘held-to-maturity’. Unfortunately, many of its peers are in an identical predicament, which is complicated by higher rates.

Treasury yield trending higher consistently could give rise to a massive bond sell-off if the Fed continues to raise rates, leaving the U.S. financial system in the lurch.

Moody placed First Republic Bank, Western Alliance and PacWest under review for downgrade on 14 March.

It is now increasingly onerous for policymakers to hike its way out of inflation without undermining the financial stability.

EBC Group says dollar still weighs on gold despite SVB failure

Dollar rules

EBC Financial Group(UK) CEO David Barrett discussed the shocking event and its potential effects in an interview with Yicai.

‘It’s a direct result of poor US regulation and also a very obvious by-product of higher interest rates,’ he said.

He thought the event was largely due to ‘less regulatory oversight than big banks like J.P. Morgan and investors fear ‘that there are more examples of SVB around.’’

‘One of the problems for the market is that it still hasn’t priced in the potential problems that come through from the Fed hiking that we’ve seen. SVB is very much a regulatory failure

and a failure of the management to manage their balance sheet correctly’

When asked about the gold performance, Barrett said ‘in terms of stress

clearly gold tends to be a haven and does better and we’ve seen a bit of that over the last week.’

But he predicted ‘the gold direction is still very much tied to what the dollars are doing’ while the greenback ‘will continue to do relatively well’ over the next few months.

As such he did not see ‘gold rush’ to go on in the long run with an exception of ‘more shocks out of things like SVB or contagion in the markets.’

Barrett recommended against ‘highly leveraged sectors’ in H1, such as tech stocks, and bonds should serve investors better. 

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