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Five warning lights that went off in the markets after the Silicon Valley bank collapse

After the collapse of a Silicon Valley bank and the turmoil in the banking sector, markets have seen up to five red flags in the past few hours. [consulta aquí las claves sobre las causas del desplome y sus efectos]. These indicators point to the threat of economic recession in the United States and Europe. This risk and the financial instability that has been proven will force central banks to reconsider aggressive interest rate hikes.

“Given recent tensions in the banking system, we no longer expect the Federal Reserve (Fed) to raise rates at its March 22 meeting due to significant uncertainty,” investment firm Goldman Sachs said in a report this week. which had access to.

This entity, and virtually everyone else who follows these monetary policy decisions, expected growth of 0.25 percentage points, in the range of 4.75%-5%—the “price of money” was 0% in the United States just a year ago. But expectations quickly changed.

Also to the European Central Bank (ECB), which in recent months shared a strategy of suppressing household demand and the investment and spending capacity of states and companies in order to fight against inflation. The institution, headed by Christine Lagarde, has raised rates in the eurozone from 0% to 3% since July. This Thursday, it is ready to increase by another 0.5 points.

This aggressiveness carries the risk of a recession and, therefore, greater unemployment and suffering for families. And this was defended by both the Federal Reserve and the ECB. Although the first big fear of this price crisis wasn’t damage to mortgage-laden homes or a hit to small and medium-sized companies. This is due to the bankruptcy of a bank specializing in technological “startups” and the imbalances in other entities.

In other words, as AFI partner David Cano points out, “If inflation was the absolute priority of central banks until yesterday, today it should be financial stability.” And this scenario haunts the financial markets like a specter.

“With this fear in the body, unemployment is guaranteed to rise and with it greater economic weakness,” which is the central bank’s antidote to inflation. According to Victor Alvargonzalez explainsThe founder of Nextep Finance, who warns that “the ECB will have to take a good look at this if they don’t want to create a bigger problem”.


One of the most popular financial indicators due to its direct impact on monthly mortgage payments is the Euribor, which trades in line with expectations of the ECB’s official interest rates. If it is above the reference “money price”, it means that more growth is expected. If it goes back, it is likely to arrive.

And this Monday it’s down nearly a tenth to 3.85% from the 2008 high it closed at last Friday, as seen in the following chart.

short term debt

This decline in Euribor shows the turn that has taken place in the financial world. A change that is more visible when negotiating short-term sovereign debt.

Markets asked for the interest rate on two-year U.S. debt, a key short-term benchmark, suffered its biggest three-day collapse since the so-called “Black Monday” of the 1987 financial crisis. 5% to 4%.

Germany’s debt to 2.6% or Spain’s debt from 3.5% to 2.9% in recent days, over the same two-year period, have also seen strong reversals.

Interest rate expectations are rising

The maturity date is one of the indications where large investors (funds, banks, insurers…) expect official interest rates in the near future in each monetary region.

And with yields falling, they signal that central banks will hold back on raising the “price of money” amid the financial turmoil that has ensued and after months of tightening funding conditions to fight inflation.

“Short-term rates are falling because of the almost certain possibility that central banks will reduce their aggressiveness from now on, at the risk of creating a much more serious economic problem.” And in an environment where managers stop hiring people and moderate or stop their expansion plans, a drop in inflation is almost guaranteed,” says Victor Alvargonzalez.

“Fear” index

Another indicator that caused alarm after the collapse of Silicon Valley Bank was the VIX, better known as the “shit index”. This indicator measures the volatility of the US stock market, and it usually increases when there are losses on the market. This Monday, the VIX jumped to fall highs as rising energy prices raised the threat of a recession in the United States and the Eurozone.

Credit Suisse Bankruptcy Insurance

And another data, which serves as a serious warning about the current uncertainty, is the all-time high index of bankruptcy insurance (CDS, according to the English acronym) quoted on the shares of the Swiss bank Credit Suisse. This entity has been in question for months due to balance sheet and solvency issues.

Source: El Diario





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