No Escape From Wild Stock Swings Amid SVB, Fed Outlook

Investors hoping for a reprieve from abrupt swings in technology stocks now are facing renewed crosscurrents from the collapse of Silicon Valley Bank.

(Bloomberg) — Investors hoping for a reprieve from abrupt swings in technology stocks now are facing renewed crosscurrents from the collapse of Silicon Valley Bank.

Just Monday, the Nasdaq 100 Index rose as much as 0.6% in choppy trading. Futures contracts had jumped as much as 2.1%, only to erase most of their gains.

The initial optimism was driven by regulators’ assurances that all of the bank’s depositors will be protected. Investors also took the view that a banking crisis, even one that’s relatively contained, may cause the Federal Reserve to back off from its campaign of aggressive interest rate increases, which would be a boon for highly valued assets like growth stocks.

But counter to that is the broader concern that Silicon Valley Bank’s collapse is a harbinger of further pain to come in the tech sector. Higher borrowing costs are only beginning to make themselves felt in the economy, and a slowdown could further deflate the 2020-2021 bubble in highly valued tech stocks.

“The question now is whether risk appetite has been marred more deeply, as markets fear they are trapped between recession on one hand or inflation on the other, or whether fresh hopes for a pause or even a pivot in interest rates from the US Federal Reserve and Bank of England stoke a fresh rally in risk assets,” said Russ Mould, investment director at AJ Bell Plc.

Tech investors had been hoping for a calmer 2023. The Nasdaq 100, after plunging by a third last year because of the Fed’s rate hikes, had stabilized, up 8.1% this year through Friday. Bulls took the view that the central bank would manage to keep inflation under control, allowing it to eventually end its rate-hiking cycle without tipping the economy into recession or crushing corporate earnings.

Silicon Valley Bank cultivated deep ties with tech companies in its four-decade history. A broad swath of the industry, including Roku Inc., Roblox Corp. and Juniper Networks Inc., entrusted the bank with its savings. But for the stock market, the collapse is more about sentiment than any potential effect on financing for the industry.

Regulators rushed to control the fallout, with the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. on Sunday jointly announcing efforts aimed at strengthening confidence in the banking system — infusing some confidence in investors.

“Barring the US Treasury and the Fed failing to stop the contagion, the impact on the technology space will probably be limited,” said Redmond Wong, market strategist at Saxo Capital Markets HK Ltd.

The failure of the lender spooked investors in some companies that have stakes in tech startups. Shares of SoftBank Group closed down 1.7% on Monday, but the Japanese conglomerate assuaged some concern by saying it didn’t expect any impact on its finances from the collapse.

All this turmoil might yield unexpected good news for technology stocks if it makes the Fed more cautious on rate hikes, said Vey-Sern Ling, managing director at Union Bancaire Privee.

Goldman Sachs Group Inc. economists also expect that the stress caused by the demise of the lender might compel the Fed to pause its monetary tightening cycle next week.

This would be an about-face for Fed Chair Jerome Powell, who only last week opened the door to a re-acceleration in the pace of interest-rate hikes.

Tech Chart of the Day

The Cboe VIX Index of US stock market volatility posted its biggest spike since June on Thursday and continued to rise on Monday as signs of distress at Silicon Valley Bank spurred broader worries over the US banking sector’s debt holdings. The gauge rose 18% or 3.5 points on Thursday and extended small gains on Monday. Stock market volatility has been low for the better part of the past six months as a rally in equities caused the VIX Index to fall as low as 17.87 points last month.