In this week’s market review, we’ll look at the banking crisis which is currently unfolding in Europe and the USA. We’ll discuss Bitcoin’s outperformance and see how it's performed as a hedge against the bank stocks.
You can catch up on last week's review here.
The potential for financial contagion remains prevalent. Credit Suisse, a significant international bank, has become the latest institution to face trouble, and was recently acquired by its domestic competitor, UBS Group, on March 20th. If Credit Suisse had collapsed, it could have caused significant strain on the global banking sector. To prevent such an outcome, the Swiss National Bank has agreed to provide $100 billion in liquidity to ensure the bank's survival.
It's important to note that Credit Suisse has been underperforming for a considerable amount of time. Its average quarterly net income over the last five years has been negative $100 million, and the company has incurred losses of nearly $10 billion in just the last two years. The company's stock price has reflected its poor performance and has dropped almost 99% since 2006, the beginning of our dataset. Credit Suisse's all-time high market capitalization was nearly $65 billion, but it was sold to UBS Group for just $3 billion. Furthermore, its assets reached a peak of $1.24 trillion in 2008, but by 2023, they had fallen by over 50% to $575 billion.
Investors have been closely watching the U.S banking sector over the past two weeks, as it has exhibited a systemic weakness. As we mentioned last week, the Federal Reserve intervened by guaranteeing deposits beyond the $250,000 maximum coverage provided by the Federal Deposit Insurance Corporation (FDIC). This move helped ease some of the market panic.
However, comments made by U.S. Treasury Secretary Janet Yellen, at a Senate committee hearing last week, did little to instil confidence in the health of regional banks. Yellen indicated that uninsured deposits would only be guaranteed in cases where their collapse would pose a "systemic risk." She reaffirmed the "too big to fail" theory, stating that only depositors of banks whose collapse could threaten the entire banking system would be guaranteed. As a result of this uncertainty, the regional banking sector has experienced a significant decline of 8% in the past few trading sessions.
Despite the fear over the banking system, the major indices had very mixed results in the prior week. The Nasdaq-100 (QQQ) experienced nearly a 6% increase, soaring 14.7% in 2023. The S&P 500 (SPY) saw a healthy 1.44% rise while the Dow Jones Industrial Average (DIA) and the Russell-2000 (IWM) saw declines of -0.12% and 2.81% respectively. There is an 18% differential between the Nasdaq and the Dow in 2023.
QQQ's strong performance can be linked to the anticipated implementation of quantitative easing by the Federal Reserve. Recently, the Fed's balance sheet experienced a significant increase of $300 billion, effectively reversing over five months of quantitative tightening in one swift move. This newly available money is intended to assist commercial banks in offsetting their substantial bond losses, which have already caused the collapse of Silicon Valley Bank just a few days ago.
Let’s see how Bitcoin has performed under the pressure of its first banking crisis. To contrast some of the bearish news in the stock and bond markets, Bitcoin has had its best week in 5 years, putting up a 31.1% increase.
Bitcoin transactions are decentralised and peer-to-peer, they have no counterparty risk. These attributes are important during a banking crisis where contagion can spread and threaten numerous institutions simultaneously. We have charted Bitcoin’s correlation against the U.S banks on a rolling 1-month basis. Bitcoin had its lowest correlation reading in over 18 months, suggesting that it has provided some protection to investors during the recent banking crisis. Is this just another bear market rally or the beginning of a new bull market in cryptocurrency?
Smooth out the volatility and invest in Bitcoin with a long-term Dollar-Cost Averaging strategy. The smart and steady way to invest in the future of money!
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