Macro Analysis | Silicon Valley Bank collaspe & CME data

This post will cover why SVB collapse, its implicaions on stocks and crypto and also new CME data after SVB disaster.

First of all, Silicon Valley Bank 'collasped' due to liquidity issue. SVB operates mainly by taking in silicon valley client's fund which was probably gotten from private equity investors and the money deposited in SVB is likely to be needed in the short term, hence SVB has to keep its liquidity. To do so, SVB invest a majority of these deposited money in US treasury bills as they are more liquid than loans, leases and bank premises. But as the FED raises interest rates, the amount of interest SVB gets from treasury bills has became lower than the amount they have to pay interest to clients. Smart clients noticed this and started withdrawing money, promting more and more client to do so until SVB is left with not so liquid assets like loans and leases, which lead to today where SVB needs a buy out.

According to CME, due this SVB collapse, wall street is now pricing in a 40% chance of 50bp hike, a decrease from 78% chance which was set after Powell's speech a few days ago. This is because SVB is a very big bank with around $209billion under them and they are also considered very liquid which might indicate that if the current pace of rate hike continues, many other less liquid or less equiped banks will see the same future as SVB. Many analyst on Wall Street believes that the government will need to some how bail out SVB as many firms in silicon valley will depend on SVB. This is because although thier money is FDIC insured, but it is only FDIC insured up to $250,000, which is nothing compared to if a company put in $100million which is the usual amount. If SVB is not bailed out, the economy will definitely suffer serious consequences and stock prices will fall as a result.

We are already seeing stock prices fall as a result of SVB's collaspe, but the bigger drop happened in the crypto market whereby everything is tanking due to SVB. Big names like Binance, Gemini and tether reacted by saying they have no ties or connections with SVB in order to preserve thier own credibility. Others like USDC are less lucky as they have $3.3billion in reserve in SVB which caused them to loss their USD peg status as now 1 USDC is only worth $0.88-$0.91 due to massive amount of selling due to a loss in confidence.

My take on this overall event is that the FED probably have anticipated something like this to happen as Powell said it himself he is expecting 2-3.5million people to loss thier job by the end of this year. The next FOMC date is on 21-22 March whereby if the FED still raises interest rates by 50bp, it will indicate that the FED is really thinking of all of these as collateral damage for the greater cause, which is 2% inflation which will caused the stock market to really tank. But if the FED comes out to say something related to becoming more dovish, the market could rise. But based on the recent speech Powell gave, i believe that the FED will raise the interest rates by 25bp in March but will say some harsh words to keep FED's credibility.