An earthquake in Silicon Valley led to aftershock on Wall Street and the tremors could still be felt in London on Friday morning,” says AJ Bell investment director Russ Mould.
Lending to tech start-ups is at the racier end of finance and in that context Silicon Valley Bank’s announcement of a $2.25 billion rescue share issue, after a period when appetite from lenders and investors towards this part of the market has dried up, should not have come as a major surprise.
“However, in a heavily interconnected banking industry it’s not so easy to compartmentalise these sorts of events which often hint at vulnerabilities in the wider system. The fact SVB’s share placing has been accompanied by a fire sale of its bond portfolio raises concerns,” said AJ Bell’s Russ Mould.
“Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable – the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income holdings.
“The FTSE 100 was firmly lower thanks to a slump in the banking sector and strength in the pound after a bounce back for the UK economy in January hit the relative value of its dominant overseas earnings.
“Growth in January was flattered by some one-off impacts in December like strikes and the World Cup in Qatar, and a resulting pause in Premier League football, unwinding. You could look at in two ways, neither of which are that favourable for markets. Either a recession will be avoided but rates will stay higher for longer than hoped or a downturn is still coming and the data is essentially just background noise.”