Pressure of Rising Funding Costs
March 14, 2023
Silicon Valley Bank’s failure highlights the pressure of rising funding costs. The Fed backstop on deposits at SIVB and SBNY reduces the likelihood of more regional bank failures, but the pressure on a banks underlying business model remains acute. Borrowing short and lending long doesn’t work when the yield curve is steeply inverted like it is today. And it’s not only banks that rely on this model. Commercial real estate lending, private equity and venture capital businesses all face similar pressure from rising funding costs and declining asset values as the economy slows. These businesses grew substantially during 12 years of disinflation and cheap funding costs. Unwinding the trade will put added pressure on the economy and prices.
The technical outlook for the S&P 500 (SPX) has a negative bias at levels below ~3990. With realized equity volatility on the rise, we see greater likelihood for the SPX to test technical support at ~3760. Today’s leadership in cyclical sectors would be encouraging if it was confirmed by commodity prices and other cross markets. Cyclical cross markets led the January equity advance on China reopening optimism, but they’ve all faded from highs with the price of copper close to breaking key support. We have a tactically bearish technical outlook for the SPX with expectations for a retest of October lows near 3550. The recent new low in the 5/10 yield curve inversion opens the door for a shallow capitulation break below ~3550.