[MarketING] Concerns Over Tightening Extend to SVB... Four Consecutive Days of Decline

Concerns Over Financial System Following SVB Bankruptcy
Short-Term Volatility Expansion Inevitable

On the morning of the 13th, when news of the US government's decision to fully protect SVB deposits was reported, the domestic stock market showed a slight rise followed by a decline. Photo by Heo Younghan younghan@

The KOSPI has been showing weakness for the fourth consecutive day. This is interpreted as being due to the impact of the recent bankruptcy of the U.S. Silicon Valley Bank (SVB) over the weekend. Experts predict that while the incident is unlikely to escalate into a systemic financial crisis, increased volatility due to weakened investor sentiment is inevitable.

KOSPI Faces Multiple Headwinds, Declines for Fourth Day

As of 10:30 a.m. on the 2nd, the KOSPI was down 20.22 points (0.84%) from the previous session, standing at 2,374.37. The KOSDAQ fell 15.18 points (1.92%) to 773.42. On this day, the KOSPI initially rose slightly before turning downward and widening its losses.

On the 10th (local time), the SVB bankruptcy intensified market anxiety, leading to a sharp decline in U.S. stock markets. The Dow Jones Industrial Average fell 1.07%, the S&P 500 dropped 1.45%, and the Nasdaq Composite decreased by 1.76%, all compared to the previous session. SVB, the 16th largest bank in the U.S., faced a liquidity crisis due to bond losses caused by interest rate hikes and deposit withdrawals by its main clients, startups. As a result, U.S. financial authorities decided to shut down SVB, delivering a shock to the stock market.

Han Ji-young, a researcher at Kiwoom Securities, said, "This has triggered fears that the 2008 Lehman Brothers crisis might be repeated, undermining the overall market's risk appetite." She added, "From the perspective of stock market investors, the key issue is whether the SVB incident will escalate into a systemic risk as it did in the past."

Analysis suggests that the possibility of this incident becoming a major systemic risk is limited. The researcher explained, "For systemic risk to occur, liquidity crises would need to spread to major commercial banks. However, since 2008, the financial soundness of large banks has been strengthened. It is important to note that the bonds SVB invested in and suffered losses from were long-term government bonds with a high proportion of unrealized losses." She continued, "Since SVB's main clients are bio-venture and tech-related startups, investment sentiment in these sectors may be unstable in the short term, but the likelihood of this becoming a major negative factor across the entire stock market is limited."

The U.S. authorities' efforts to contain the fallout from the SVB incident also appear to have mitigated the shock to the stock market. On the 12th (local time), the U.S. Treasury Department, Federal Reserve (Fed), and Federal Deposit Insurance Corporation (FDIC) issued a joint statement guaranteeing all customer deposits at the closed SVB regardless of insurance limits and announced that they would support banks with loans for deposit withdrawals if necessary to minimize the impact of SVB's bankruptcy. This measure was announced ahead of the Asian financial markets opening.

While the incident is unlikely to spread throughout the banking sector, it is expected to act as a factor increasing short-term volatility. Na Jung-hwan, a researcher at NH Investment & Securities, said, "The SVB bankruptcy may act as a short-term volatility factor in the domestic stock market as it strengthens investors' avoidance of risky assets." He added, "Furthermore, with the U.S. February Consumer Price Index (CPI) scheduled for release on the 14th and the Federal Open Market Committee (FOMC) meeting on the 22nd, the possibility of a 50 basis point (1bp=0.01 percentage point) rate hike by the Fed is increasing. This could combine with concerns about the contagion effect of the SVB bankruptcy to further increase short-term stock price volatility."

Impact of SVB Incident on Fed Monetary Policy

Attention is focused on how the SVB incident will affect the Fed's policy. The bankruptcy confirmed that the rapid tightening that has continued since last year has affected the asset soundness of banks including SVB. There are forecasts that the Fed's stance will find it difficult to become more hawkish due to this incident.

Moon Nam-jung, a researcher at Daishin Securities, said, "The SVB incident will act as a centripetal force preventing the Fed's monetary policy stance from becoming more hawkish after March." He added, "If it is confirmed that concerns about a chain reaction to other small and medium-sized banks do not spread further, the SVB incident should be seen as an investment opportunity amid market conditions that have diverged from fundamentals."

Byun Jun-ho, a researcher at IBK Investment & Securities, said, "Given the rise in unemployment and slowdown in wage growth observed in the U.S. labor market in February, the rationale for the Fed's rate hikes has somewhat weakened. If the CPI to be released this week meets or falls below expectations, the Fed's tightening trajectory is likely to weaken." He predicted, "The SVB incident is expected to further strengthen the slowdown in U.S. employment and the economy as well as disinflation, and expectations for rate cuts in the second half of the year will be reemphasized." He added, "If the SVB incident marks the beginning of a tone change by the Fed, the stock market could quickly stabilize. Once the SVB incident calms down, investors' attention will return to the Fed and disinflation."