UK markets suffered further selling pressure this week, with the FTSE 100 Index falling by 3.82% to trade at 7,445 points at the time of writing. Concerns about the health of the global financial sector rattled investors again this week, following the collapse of Silicon Valley Bank last Friday.
Swiss bank Credit Suisse’s shares slumped more than 25% earlier in the week after the top shareholder, Saudi National Bank, ruled out more aid leading to the halt in trading of several European banks. Markets began to rebound on Thursday after financial support for Credit Suisse and First Republic Bank eased concerns about the banking sector’s vulnerability. Credit Suisse said it would borrow up to $54 billion from the Swiss National Bank under a covered loan facility and a short-term liquidity facility. Large US banks also agreed to contribute $30 billion in deposits to First Republic Bank to restore confidence in the financial system.
UK Chancellor Jeremy Hunt delivered the budget on Wednesday which offered a £9 billion tax break for businesses, an extension of free childcare and a surprise pension boost for the well-off. The UK Chancellor also announced a 100% tax break for business investment to try to lift the country’s sluggish growth rate.
The budget contained two big measures intended to keep people in work: a £5 billion extension of free childcare in England and the controversial scrapping of the £1 million lifetime allowance on tax-free pension contributions. The UK Chancellor also stated that the Office for Budget Responsibility has forecast that the UK will avoid falling into recession this year. Inflation is also expected to fall much closer to the Bank of England’s 2% target, falling from over 10% to just 2.9% by the end of this year.
The Office for Budget Responsibility now expects positive growth of 1.8% in 2024, followed by growth rates of 2.5%, 2.1% and 2.2% in 2025, 2026 and 2027 respectively. By comparison, the International Monetary Fund currently expects the UK economy to shrink by 0.6% this year. The British and global economy have held up better than expected, helped by energy prices beginning to fall.
Commodity markets
In the commodity markets, Brent Crude futures traded around $75 per barrel on Friday and are set for the worst week this year having faced heavy selling pressure earlier in the week as the global banking turmoil ignited fears of broader weakness in the global economy.
Oil is down approximately 8% this week and is now trading at its lowest levels since December 2021. OPEC+ considers this week’s slide in oil prices to be driven by financial fears, rather than any imbalance between demand and supply, and expects the market to stabilise. OPEC’s latest monthly oil market report, released on Tuesday with an upgraded demand forecast for China, pointed to a sound balance between supply and demand.
Gold prices rallied this week, to trade over £1,930 an ounce on Friday as the global banking turmoil drove investors to hedge with the safe haven metal. Expectations that major central banks would soften their stance on inflation in order to avoid a severe recession also supported gold prices. Nevertheless, the European Central Bank raised its policy rate by 0.5% on Thursday despite the vulnerability of some European lenders, saying higher rates could improve bank margins.
US equity markets
US equity futures were mixed on Friday after the major averages rallied during Thursday’s regular session, as a rescue package for First Republic Bank eased market concerns about another bank failure in the US. In regular trading on Thursday, The Dow Jones Industrial Average rose 1.17%, while the S&P 500 Index gained 1.76% and the Nasdaq Composite rallied 2.48%.
Data showed banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week, a sign of escalated funding strains in the aftermath of Silicon Valley Bank’s failure. Data published by the Federal Reserve showed $152.85 billion in borrowing from the discount window, the traditional liquidity backstop for banks, in the week ended March 15, a record high, up from $4.58 billion the previous week.
US Treasury Secretary Janet Yellen has told a Senate committee that the US banking system is “sound” and defended the Biden administration’s actions to rescue depositors at two failed banks, amid fears of broader financial contagion. This was in response to US regulators and officials on Sunday stepping in to guarantee all deposits at the collapsed Silicon Valley Bank and Signature Bank, and setting up a new Federal Reserve facility to provide liquidity to other banks.
On the economic data front, first time filings for unemployment insurance declined while housing starts and building permits showed the US housing market is recovering.
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