Signs of pain as easy cash era ends are growing

LONDON (Reuters) – The easy-cash era is over and markets are feeling the pinch from the sharpest jump in interest rate in decades.

The collapse of U.S.-lender Silicon Valley Bank (SVB) in early March after heavy losses on its bond portfolio as rates climbed was a wake-up call for markets that monetary tightening will likely bring more pain.

Since late 2021, big developed economies including the United States, euro area and Australia have raised rates by almost 3,300 basis points collectively.

The race to raise rates https://www.reuters.com/graphics/GLOBAL-MARKETS/lbvggjjagvq/chart.png

Here’s a look at some potential pressure points.

1/ BANKS

Banks remain at the top of the worry list after the collapse of SVB, as well as Credit Suisse’s forced merger with UBS, sparked turmoil across the banking sector.

Investors are alert to which other banks might be sitting on unrealised losses in government bonds, the prices of which have dropped sharply as rates have risen.

The SVB bond portfolio losses have highlighted similar risks for Japanese lenders’ gigantic foreign bond holdings, which carry over 4 trillion yen ($30 billion) in unrealised losses.

Japanese, European and U.S. banks stocks, while off recent lows, are still well below levels seen just before SVB’s collapse.

Bank stocks tumble after SVB, Signature Bank collapse https://www.reuters.com/graphics/GLOBAL-BANKS/gdpzqkermvw/chart.png

2/ DARLINGS NO MORE

As the SVB collapse showed, stress in the tech sector can quickly ripple out across the economy.

Tech firms are reversing pandemic-era exuberance, with Google owner Alphabet, Amazon and Meta in March conducting their latest rounds of layoffs after years of hiring sprees.

Housing markets in U.S. tech hubs such as Seattle and San Jose are cooling more rapidly than in other regions, real estate broker Redfin Corp says.

In commercial property, a restructuring by Pinterest will see the social media company exit office leases.

Investors wary of global stress should keep their eyes on Silicon Valley, as ructions in this major U.S. industry cause aftershocks in Europe and beyond.

Meta has cut nearly a quarter of its employees https://www.reuters.com/graphics/TECH-LAYOFFS/META/byprlmorqpe/graphic.jpg

3/ DEFAULT RISKS

Rising rates pose a threat to sub-investment grade companies, which have to pay up when refinancing their maturing debt and risk defaulting on it.

S&P expects U.S. and European default rates to reach 3.75% and 3.25%, respectively by September, more than double the 1.6% and 1.4% in September 2022. Pessimistic forecasts of 6.0% and 5.5% not “out of the question”, it says.

Deutsche Bank strategist Jim Reid wrote this week that “corporates are more levered now than during the great financial crisis and this cycle could ultimately be more corporate default focused versus financials.”

Corporate default rate may double in 2023 https://www.reuters.com/graphics/GLOBAL-STRESS/egvbyanonpq/chart_eikon.jpg

4/ CRYPTO WINTER

Having benefited from an influx of cash during the easy-money era, cryptocurrencies have felt pain as rates rose last year, then gained on recent signs that tightening could end soon.

The most popular cryptocurrency, bitcoin, has been an unexpected beneficiary of broader market turmoil, surging around 40% in just 10 days.

Analysts attributed the gains to market expectations that rate hikes were nearing their peak, support risk-sensitive assets such as bitcoin.

But there are reasons for caution towards crypto assets — the collapse of various high-profile crypto firms last year left crypto customers shouldering large losses, while U.S. authorities are increasingly cracking down on the crypto sector’s largest players.

Pain in crypto land https://www.reuters.com/graphics/GLOBAL-MARKETS/lgpdkjemevo/chart.png

5/ FOR SALE

Rising rates operate with a time lag, which means the impact on rate-sensitive housing markets has yet to be fully felt.

A distressed debt index compiled by law firm Weil Gotshal & Manges showed that real estate remains the most distressed sector by some margin in Europe and the UK.

Economists are also worried that commercial property could be the next shoe to drop if global banking woes trigger a broader credit crunch for the multi-trillion-dollar sector that was already under pressure.

Capital Economics said that U.S. commercial real estate (CRE) prices have fallen by 4-5% from their peak in mid-2022 and expects a further 18-20% drop.

The reliance of the sector on lending from small and mid-tier banks — which provide about 70% of outstanding loans to CRE — is worrisome as those banks are facing pressure on their deposit base, the firm noted.

Distress in Europe’s real estate sector rises https://www.reuters.com/graphics/GLOBAL-STRESS/znpnblgjapl/chart.png

(Reporting by Yoruk Bahceli, Chiara Elisei, Nell Mackenzie, Dhara Ranasinghe, Naomi Rovnick, Elizabeth Howcroft; Compiled by Chiara Elisei; Graphics by Kripa Jayaram and Vincent Flasseur; Editing by Dhara Ranasinghe and Andrea Ricci)