🏦 Banking jitters

Banking’s no good, very bad week… Global bank stocks were on a roller coaster last week after the collapse of Silicon Valley Bank, which serviced about half of America’s venture-backed tech companies. A high-level recap of the second-largest bank failure in US history: when interest rates were ultralow, SVB invested most of its deposits into US Treasury bonds with long durations (think: 10+ years) to earn slightly higher interest. But when interest rates soared, the value of SVB’s old bonds plunged by $15B and its tight-knit VC customers all tried to pull their money out at once (spoiler: it couldn’t meet their requests).

Not-so-balanced sheets… Swiftly rising interest rates have led to two main problems for banks that failed to properly factor in this risk: (1) the value of their assets (think: bonds, loans, investments) fell as rates rose, and (2) customers withdrew more idle cash from their accounts in favor of higher-interest investments. After SVB’s fall, regional banks’ financial stability has come under scrutiny as traders and depositors look to identify banks with similar balance-sheet risks. Think: a high rate of uninsured deposits (accounts over the FDIC-insured $250K) and bonds with a long time to maturity. First Republic had the third-highest rate of uninsured deposits among US banks, after SVB and Signature Bank. Now it’s in the spotlight.

• Initially: After the collapse of SVB and Signature, regulators announced an emergency backstop to ensure that depositors at both banks had access to all their funds. But…
• Monday: First Republic stock sank a record 60%+, even after assuring depositors that it had $70B in liquidity thanks to backing from JPMorgan and the Fed.
• Thursday: 11 big banks pledged to inject $30B into First Republic, boosting the stock. But by Friday the rebound lost steam, with First Republic shares falling another 33%.
• Meanwhile: Credit Suisse secured a $54B lifeline from the Swiss National Bank, and on Sunday UBS agreed to buy its struggling rival for $3.2B.

Panic can be a self-fulfilling prophecy… which is why governments are taking extraordinary measures to contain the damage. Treasury Secretary Janet Yellen said the US banking system “remains sound,” and President Biden pledged to do “whatever needed” to ensure America's banking-system confidence. Last week 68% of US consumers said they still had a fair amount of confidence in banks. Still, Yellen said that the government would not refund uninsured deposits for every single bank that fails (only those that would pose a systemic risk if they failed). Most Americans don’t have over $250K in individual bank accounts anyway, but many companies do.

J. Pow needs an herbal tea… Between bank collapses and new inflation data, a lot’s happened recently that could influence the Fed’s important rate-hike decision this Wednesday. Some investors expect the banking crisis could pressure the Fed to cool on rate hikes (which contributed to banking woes). Most traders predict a hike of 25 basis points, down from 50 last week. Some firms even expect Powell will pause hikes (#Pow-se). While inflation isn’t cooling as fast as the Fed hoped, Goldman Sachs said it no longer expects a hike on Wednesday.

China's tech scene checks in… WeChat owner Tencent (also the world’s biggest gaming company) and ecomm giant Pinduoduo are set to report. The tech titans’ earnings come as China’s economy reopens after years of strict Covid policy. Meanwhile, China's tech world could be on the verge of an AI-powered shakeup. Both Tencent and Alibaba Group (the Amazon of China) are reportedly working on ChatGPT rivals. Meanwhile, Baidu (the Google of China) disappointed investors last week with its AI-chatbot demo.

Affordable EV race… Volkswagen plans to spend $126B+ on "electrification and digitization" as it pushes to grow its EV market share. The German auto powerhouse rolled out its design for a $26K EV set for release in 2025. The race toward less pricey EVs reflects growing competition for electric market share. Tesla has slashed prices several times this year and said it'll cut future EV production costs by half. Tesla risks getting passed, and not just by Volkswagen: Chinese startup XPeng launched two EVs in Europe that are priced below Teslas.

• TikBan: Biden threatened to ban TikTok in the US unless it separates itself from its Chinese parent, ByteDance. Meta, Snap, and Google shares surged on the potential demise of their social rival.
• Metout: Meta is ending its ambitious NFT push just as digital collectibles start regaining relevance. It’s the latest example of Meta’s bad trend timing, which includes its massive metaverse investment.
• Resort: Within the span of a month, Silicon Valley Bank went from hosting a summit at a fancy ski resort to reaching out to lenders of last resort. Check out our recap of the bank’s swift demise.

• Busted: Hiring managers are starting to spot eerily similar prompt answers and cover letters as job seekers use ChatGPT to dress up applications. Now employers are starting to use bot detectors to help evaluate candidates.
• Sweat: SVB’s collapse could hurt clean-energy funding. FYI: SVB financed 62% of US community solar projects. Now many are looking to the Inflation Reduction Act to help cushion the blow.

• Monday: Earnings expected from Pinduoduo and Foot Locker
• Tuesday: Fed meeting begins. Earnings expected from Nike, Tencent Music, and GameStop
• Wednesday: Earnings expected from Chewy and Petco
• Thursday: New-home sales. Earnings expected from Accenture and General Mills

Authors of this Snacks own shares: of Amazon, Google, Snap, and Tesla

ID: 2800987