Snapshot - A second front in the fight against inflation

March was chaotic for both private and public markets. In response to the threat of bank runs in the era of instant communication, the Federal Reserve and other central banks took action to shore up available liquidity and stave off a financial disaster.

The latest Global Markets Snapshot breaks down a month of trends in the equity, debt, and commodities markets, tracking returns across a range of indexes and sectors. It also features private markets activity, including major deals, fundraising, IPO performance, lending volumes and unicorn creation. In this monthly digest, we provide the datasets that the PitchBook Institutional Research Group is keeping an eye on as markets remain volatile.

The closeout of the first quarter of 2023 brought with it panic in the US VC ecosystem which radiated into broader concerns over the health of the global financial services sector. On the month, the KBW Nasdaq Bank Index - an index that tracks the performance of publicly traded and thrifts in the US - was down nearly 25%. The precipitous drop in US financials equities was spurred on first by the announcement from a struggling Silicon Valley Bank (SVB) on March 8 that it was planning to sell upwards of $1.75 billion in shares to shore up its balance sheet in the face of what became overwhelming withdrawal requests from its primarily venture capital-oriented client base. Upon failing to accomplish this sale, the bank was taken into FDIC receivership on March 10 to protect depositors and stem the bleeding. Only two days later, Signature Bank of New York, also facing heavy withdrawal requests, was likewise taken into FDIC receivership. Investors headed for the exits from smaller regional banks which appeared to be exposed to asset book vs. market value mismatches and bank run risks similar to those experienced by SVB and Signature Bank; for example, the tranche price of 4.375% bonds due in 2046 issued by SVB competitor First Republic Bank fell 28.1% on the month, ending the quarter trading at $54.49, deep in distressed territory.

To stem the tide of fear roiling financial markets, the US Federal Reserve (Fed) stepped in with several policy decisions both on its own and in coordination with other global central banks. On March 12, the same day as the failure of Signature Bank, the Fed created a new Bank Term Funding Program. The new liquidity facility offers loans up to a year in duration to qualifying depository institutions to help banks meet withdrawal requests; most importantly, however, it allows banks to borrow against assets such as US Treasuries at par value rather than market value. This means these institutions can borrow 100 cents on the dollar while putting up as collateral bonds whose prices fell below face value when the Fed hiked interest rates. On March 19th, the same day as the announcement of the sale of the distressed Credit Suisse to UBS Group AG, the Fed, alongside the central banks of England, Canada, Switzerland, Japan, and the Eurozone, announced the beginning a coordinated effort to improve global US dollar liquidity by temporarily increasing from weekly to daily the frequency of seven-day maturity operations through existing US dollar liquidity swap line arrangements. These operations are, in effect, daily loans denominated in US dollars offered by central banks to depository institutions in their geographies to further bolster liquidity, with the goal of averting an illiquidity crisis if bank runs spread.

Meanwhile, as the Fed is spearheading the drive to stabilize domestic and global banking sectors, it still faces an uphill battle against inflation. While progress has been made over thelast six months on the Fed-preferred headline Personal Consumption Expenditures basis, core inflation continues to remain stubbornly flat at 4.6% for the trailing 12 months ending February, which has been at the same level since the trailing 12-month period ending December 2022. This leaves the US central bank in a precarious position: It must simultaneously continue raising the target interest rate to bring inflation down to its goal and stave off an inflationary rebound while also avoiding a serious credit crunch caused by a contracting financials sector. It remains to be seen how successful the Fed will be in this dual mission.