The Stock Market
Global Market: S&P 500 & NASDAQ
The collapse of SVB has not only stunted innovation but also sent waves through the economy, accelerating the down drive of the stock market that has been foretold since the beginning of the year. The S&P 500 has fallen 6.89% from its peak in mid-February to 3861.59 on 10 March. A similar fall of 6.76% was observed in the NASDAQ index as the stock price closed out at 11830.28. Low market confidence in investments overshadowed the slowing growth rate of fuel oil and electricity prices across the US, even as inflation remains high at 9.2%.
Global Market: FTSE100
Over in the UK, the FTSE100 has steadily declined from its peak of 8014.31 in the 3rd week of February to 7748.35 on 10th March. Inflation remains high at 10.1% but shows some signs of slowing. However, wages fail to catch up as regular pay growth has fallen to about 6.6% by the end of February. Questions about the budget position come into question SVB shocks the start-up and innovation scene in England, an established FinTech hub. PM Rishi Sunak has long been a vocal supporter of entrepreneurship hence it will be interesting to see how the recent funding shock amongst venture capital impacts the financial budget as they balance this cost of living crisis.
Green Finance News: ESG Metrics
Towards the end of 2022, the world’s largest asset manager, BlackRock, faced vital accusations of “greenwashing” their portfolios. In December of that year, the state of Florida made the most significant one-off investment to date by withdrawing around $ 2 billion from its portfolios. This comes against the backdrop of a primarily politicised debate between the financial preferences of right and left-wing corporations. Right-wing investors prefer to let the free market decide investment strategies and deem ESG restrictions a violation of efficient allocation principles; perhaps it could also come down to their vested interest in fossil fuel companies. Left-wing investors favour the social good of their investments, but there is a legitimate argument to see if these “climate cartels” could violate fair governance practices.
Recently, the MSCI has made fundamental changes to its sustainability indices for its screened index ranges amidst regulator changes within Europe. When comparing a sustainable fund to a parent index fund, the marquee adjustment comes from a 30% carbon intensity reduction. Companies that generate 5% of their revenue from the extraction of palm oil or arctic gas will also be excluded from the index. These changes will force BlackRock to review its indices heavily as they had already expressed a downgrade of their fund to a “less green” classification by the Sustainable Finance Disclosure Regulation standards previously. These changes will restore some much-needed credibility to the ESG fund classifications.
The Crypto Market
Cryptocurrency Market: Bitcoin & Ethereum
The recent bank runs have sparked a rollercoaster ride of valuations in the crypto market, with the past weekend separating some of the lowest and highest valuations seen in the month. Bitcoin rose by 19.8% to 24212.10, while Ethereum rose by 17.6% to 1681.93. Last weekend, the crypto space was in terrible shape as 2 of the banks forced to close, Signature Bank and Silvergate Capital, were major providers of financial services to the crypto space. This has long-term bearings on the development of crypto as a banking alternative as in its current form, it still requires strong ties to the traditional market at this current state. For example, Circle’s stablecoin was forced to de-peg itself as 8% of its holdings were in the now-collapsed Silicon Valley Bank.
In the short run, however, two factors have driven its recovery over the past few days. Firstly, investors expect that the bank runs will cause interest rate hikes to seize momentarily. Secondly, the governments have intervened quickly to bail out these banks to ensure that depositors can recover their money. This prevented a colossal bank run that could escalate into a financial crisis, much like in 2008. A combination of these reasons has invigorated some short-term confidence however, in the long run, taking the macroeconomic climate into account, these positive trends will not persist, given that crypto markets are still very much tied to existing banking systems.
Protocol News: Europeum
Prior to the collapses, the EU was exploring the option of developing its own blockchain protocol, Europeum, to test DeFi applications and spur Web 3.0 innovations. The protocol is built specifically to record property ownership, licensing and contracts with the EU regulations in mind. With the Markets in Cryptocurrency Assets regulation at the forefront, this innovation could enable the EU to be a pioneer jurisdiction with a clear framework for cryptocurrencies.
Nevertheless, some privacy and transparency issues must be ironed out before this innovation is adopted. There is a call for this innovation to be used only for less sensitive materials like administrative documentation or higher education certification instead of financing. Given the climate as well, it is almost guaranteed that the development of the protocol will be put on hold.
In Other News…
Venture Capital News: Silicon Valley Bank (SVB)
On March 10th, the SVB collapsed just 48 hours after it showed signs of difficulties paying back depositors, triggering a classic bank run as depositors rushed to withdraw their cash. This event is the second-largest bank run in US history, behind the 2008 financial crisis. The SVB has been fuelling the technology and innovation ecosystem since 1983 and has provided services to at least 50% of all US venture-backed services. Over the years, it has extended its branch across the border, meaning that this collapse will lead to a catastrophic few months of venture capitalists and entrepreneurs worldwide. Given that the tech sector has been booming until recently, it seems puzzling that such a core component of venture capital would have insufficient reserves, given that it owned over $200 billion of assets at the time of the collapse. Hence we will unravel what led to its downfall and understand how this could impact the markets in the long run.
Peeking Under The Hood
Like all banks, SVB earns money by investing in their client’s deposits. SVB had been so successful for many years that it often had excess deposits relative to loans it could make. Therefore, the bank placed over $80 billion into mortgage-backed securities. This proved to be a risky decision as SVB was confident in its position that it failed to see how this decision could have negatively impacted its economic value of equity, the measure of the company’s interest rate risk in the long run. A series of high inflation across the globe in the past 6 months meant that the value of the securities tanked significantly, putting it in a poor financial position. Moreover, SVB is unique in that it does not have a diverse client base, given its focus on science and technology-related sectors and most of its clients are made up of venture capital firms instead of well-insured private banks.
A poor run of capital raising accompanies this high-risk exposure. Hence SVB decided to sell off most of its securities at a loss as a temporary solution to these financial downfalls. Compared to 2008, one factor that severely bred the fearmongering mentality amongst depositors was social media. A frenzy was created on Twitter, a common platform used by Gen-Z entrepreneurs and start-up CEOs. Clients took this as a negative signal and withdrew their deposits, coming up to about $42 billion worth of withdrawals.
VC Ecosystem Breakdown
Aside from the series of bank collapses and its impact on the stock market, what does this mean for the innovation ecosystem? For starters, initial signs suggest that the US fed has intervened quickly enough to liquidate the bank so that depositors and creditors will regain their money, restoring some confidence in the economy. Additionally, this is a niche situation as not many other banks are as exposed to the problems faced by the technology sector as SVB was. Hence this should not trigger a further financial crisis. That said, this is a poor time to be an entrepreneur, leading to the collapse of promising start-ups, which could set the world back by a few years. The Fed can only guarantee the return of cash deposits for up to $250,000, which may not be enough in this climate.
The structure of this ecosystem is such that even if a start-up did not use SVB directly, their vendors are likely clients, which carries many knock-on effects. This is especially concerning for their regional clients like those in the UK. With the macroeconomic situation significantly worse off in Europe, venture capital will freeze for a long time.
HSBC Bailout & Future Steps
For the UK, HSBC seems to have saved the situation with their £1 buyout of SVB’s UK arm under the facilitation of the Bank of England. This was a strategic decision from HSBC and the government as they tried to re-establish confidence in these potentially disruptive sectors by preventing insolvency, which would have further reduced the number of payouts given back to the depositors. There has been a push from Barclays to take the reigns over UK innovation and HSBC has positioned itself to challenge them in this regard.
On a broader scale, we should expect regulators to look at the risk management and liquidity-related issues in banking to prevent this from happening again. Following this, banking behaviour will also adjust because clients will prefer to seek funding from larger retail banks instead of smaller banks or commercial banks, as these are deemed “safer” for the immediate future. More than ever, behavioural economists should look at the power of social media and information transfer because policy responses are not fast enough to instil confidence amongst investors before fear captures the market. There are many lessons to learn, and innovation is the price paid this time.
Short Updates:
SpaceX – SpaceX Crew-6 returned to earth after a 157-day mission in an orbiting laboratory. They conducted over 200 experiments to advance developments in im-space technologies and advanced materials.
GPT-4 – Artificial Intelligence continues to evolve rapidly as GPT-4 is set for launch as early as mid-March. The latest version focuses on multi-modality, meaning that AI-generated videos, images or music could be created.
