Stocks Slump on Contagion Risk from the Silicon Valley Bank Collapse

What you need to know…

The S&P 500 Index ($SPX) (SPY) Friday closed down -1.45%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.07%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.38%.

Stock indexes Friday added to Thursday’s sharp losses, with the S&P 500 falling to a 2-month low, the Dow Jones Industrials falling to a 4-month low, and the Nasdaq 100 falling to a 6-week low.  Bank stocks fell on contagion risk in the banking sector with the failure of Silicon Valley Bank.

U.S. regulators on Friday closed its Silicon Valley Bank, the biggest U.S. bank to fail since 2008.  The California Department of Financial Protection and Innovation said Friday that it had taken possession of Silicon Valley Bank and appointed the Federal Deposit Insurance Corp. as a receiver, citing inadequate liquidity and insolvency. 

Shares of SVB Financial Group, the owner of Silicon Valley Bank, plunged -63% in pre-market trading Friday before trading in the stock was halted.  A run on the bank ensued Friday after Peter Thiel’s Founders Fund and other prominent fund managers advised businesses to withdraw their money from the bank.  SVB has its own particular problems, but the financial industry as a whole is seeing strains from the Fed’s aggressive rate-hike regime.

Stocks saw underlying support from today’s U.S. Feb unemployment report, which showed an unexpected increase in the unemployment rate and weaker-than-expected hourly earnings, although payrolls showed a larger-than-expected increase. The report dampened speculation that the Fed will accelerate its pace of interest rate hikes. 

The turmoil in the U.S. banking sector fueled safe-haven demand for government debt and sent bond yields plunging.  Bond yields fell even further after Friday’s U.S. Feb unemployment report showed a smaller-than-expected increase in wages.  The 10-year T-note yield tumbled to a 3-1/2 week low of 3.670%. Also, expectations for a +50 bp rate hike at the Mar 21-22 FOMC were quashed as the markets now expect only a 25 bp rate hike.

According to EPFR Global data cited by Bank of America, investors in the week through March 8 pulled $500 million from equity funds and piled $18.1 billion into cash and $8.2 billion into bonds.

U.S. Feb nonfarm payrolls rose +311,000, stronger than expectations of +225,000.  The Feb unemployment rate unexpectedly rose +0.2 to 3.6% versus expectations of no change at 3.4% as the Feb participation rate climbed to 62.5% from 62.4% in Jan.

U.S. Feb average hourly earnings rose +0.2% m/m and 4.6% y/y, slightly weaker than expectations of +0.3% m/m and +4.7% y/y.

Bitcoin (^BTCUSD) closed down more than -1% at a 1-3/4 month low Friday on negative carryover from Thursday when Silvergate Capital said it plans to wind down operations and liquidate its bank.  In addition, an escalating U.S. regulatory crackdown on crypto is also hurting market sentiment, with the U.S. Securities and Exchange Commission (SEC) contending that many crypto coins are securities, a designation that would potentially make them harder to trade. 

Overseas stock markets Friday settled lower.  The Euro Stoxx 50 closed down -1.22%.  China’s Shanghai Composite stock index closed down -1.40%, and Japan’s Nikkei Stock Index closed down -1.67%. 

Today’s stock movers…

Bank stocks tumbled Friday on the concern about rising financial risks in the banking sector after the collapse of Silvergate Capital and SVB Financial Group’s Silicon Valley Bank. Signature Bank of New York (SBNY) closed down more than -22% to lead losers in the S&P 500.  Also, First Republic Bank of California (FRC) closed down more than -14%.  In addition, Comerica (CMA), Lincoln National (LNC) and Truist Financial (TFC) closed down more than -6%.  Finally, Goldman Sachs (GS) and Fifth Third Bancorp (FITB) closed down more than -4%. 

Real estate investment trusts were under pressure Friday after the collapse of Silicon Valley Bank sparked concerns about bank funding.  As a result, Alexandria Real Estate Equities (ARE) closed down more than -8%, and Boston Properties (BXP) closed down more than -7%.  Also, Healthpeak Properties (PEAK) and Essex Property Trust (ESS) closed down more than -6%.  Simon Property Group (SPG) and Federal Realty Investment Trust (FRT) closed down more than -5%. 

Caterpillar (CAT) closed down more than -5% to lead losers in the Dow Jones Industrial after UBS downgraded the stock to sell from neutral, saying its growth momentum is not strong enough to justify its valuation. 

Oracle (ORCL) closed down more than -3% after reporting Q3 cloud license and on-premise license revenue of $1.29 billion, weaker than the consensus of $1.38 billion. 

DocuSign (DOCU) closed down more than -22% after forecasting Q1 billings of $615 million to $625 million, below the consensus of $625.1 million. 

The Gap (GPS) closed down more than -6% after reporting Q4 net sales of $4.24 billion, below the consensus of $4.36 billion.

Stratasys (SSYS) closed up more than +9% after Nano Dimension offered to buy the rest of Stratasys stock that it doesn’t already own for $18 per share in cash, a 28% premium to Thursday’s close.   

Drug stocks and pharmaceutical makers moved higher on a defensive play as investors fled the turmoil in financial stocks.  AbbVie (ABBV) closed up more than +1%.  Also, Amgen (AMGN) closed up +0.92%, and, Moderna (MRNA) closed up +0.68%.  In addition, Regeneron Pharmaceuticals (REGN) closed up +0.44%, and Vertex Pharmaceuticals (VRTX) closed up +0.13%. 

Consumer staple stocks moved higher on a defensive play from the selloff in the broader market. Clorox (CLX) closed up +0.52%.  Also, Dollar Tree (DLTR) closed up +0.48%, and Procter & Gamble (PG) closed up +0.45%.  In addition, Kraft Heinz (KHC) closed up +0.40%, and Campbell Soup (CPB) closed up +0.34% 

Newmont (NEM) closed up more than +1% to strength in metals prices, with gold and silver prices up more than +2%. 

Across the markets…

June 10-year T-notes (ZNM23) on Friday closed up +1-21/32 points, and the 10-year T-note yield fell by -21.2 bp to 3.691%.  T-notes Friday rallied sharply to a 3-1/2 week high, and the 10-year T-note yield plunged to a 3-1/2 week low of 3.670%.  T-note prices rallied on the turmoil in the U.S. banking sector, which boosted safe-haven demand and reduced expectations for further Fed tightening.  T-note prices also saw support from Friday’s U.S. Feb unemployment report, which showed an increase in the unemployment rate and a smaller-than-expected increase in Feb average hourly earnings.  T-note prices also rose on a decline in inflation expectations after the 10-year breakeven inflation rate Friday dropped to a 5-week low of 2.222%.

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