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March 15, 2023

The Banking Collapse Explained

Frank Cabibi

Sudden panic entered the market over the weekend that sparked a major downturn in stocks and USD. What are known as Silicon Valley Bank (SVB), reported a $2 billion loss in their investments as a result of interest rate hikes. This caused a severe sell off over the next trading session. The goal of this article is to help explain what happened in this most recent banking collapse and why certain assets are reacting the way they are.

What Caused the SVB Collapse

Here is a brief summary of what happened according to USA Today:

Back in 2020-21, when interest rates were low, the Fed-fueled rally had taken bond yields to nearly 0%, causing a spike in bond prices. The bank decided to invest in bonds for the long as a result. However, the Fed began raising interest rates, and this caused bond prices to fall. This weekend, SVB announced that they had lost $1.8 billion from bond investments.

When the public saw this, the bank's stock cratered lower. Panic withdrawals occurred as over $150 billion of SVB's value was lost in a matter of hours. Bond yields, stocks and USD tanked while gold soared. Other regional banks fell in fears of a larger collapse. This was one of the biggest bank failures in US history.

What This Means For The Markets

In order to prevent another calamity like 2008, the Fed may have to step in and keep these failures to a minimum. The problem of inflation still remains, and Powell has to be careful not to repeat 2020's stimulus scheme that bailed us out but caused higher inflation in the first place.

Broken banks tend to hurt stocks and help gold. In this particular case, USD might also be bullish. Here are some trade setups on these assets.

SPX500

In the last 2 days, SPX500 fell as much as 2% following the SVB news over the weekend. Price has a nice level of resistance on the 4H timeframe where there is a falling trend line coupled with a double top around $3924.

Gold

Gold went up as much as 3.7% since the collapse and is testing resistance in the $1920s. A close above this zone could take price up to the $1950s which was a 2023 high.

DXY

The USD jumped up from its 50 DMA on the 1D timeframe and regained about half of what it lost in the last three days. Resistance lies around 105.480.

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