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LONDON MARKET CLOSE: Stocks sharply lower amid SVB contagion fears

13th Mar 2023 16:57

(Alliance News) - Stocks in London ended firmly lower on Monday as the fallout from the collapse of Silicon Valley Bank continued to ripple through markets.

The FTSE 100 index closed down 199.72 points, or 2.6% at 7,548.63 on Monday. The FTSE 250 ended down 532.38 points, or 2.8%, at 18,825.08. The AIM All-Share closed down 18.28 points, or 2.2%, at 819.16.

The Cboe UK 100 ended down 2.4% at 755.81, the Cboe UK 250 closed down 2.8% at 16,495.28, and the Cboe Small Companies ended down 2.4% at 13,230.71.

On Thursday, shares in SVB's parent company, SVB Financial Group, fell more than 60% following the disclosure that it had lost USD1.8 billion in securities sales in an effort to raise funds. Trading in its shares were halted early Friday after a sharp decline in pre-market trading.

Fears that the collapse of Silicon Valley Bank on Friday could spark contagion throughout the banking system forced the US Federal Reserve, the Treasury Department and Federal Deposit Insurance Corp over the weekend to promise to fully protect all depositors and give backup to any lenders struggling to find cash, providing easier terms on short-term loans.

Analysts at Brown Brothers Harriman said, despite the raft of measures announced by US policymakers, equity markets remain under pressure and US Treasury yields have plummeted.

"This has taken a toll on the dollar, which really should be benefiting from a safe-haven bid," BBH said.

The pound was quoted at USD1.2157 at the London equities close on Monday, up sharply from USD1.2025 at the close on Friday. The euro stood at USD1.0737, higher against USD1.0637. Against the yen, the dollar was trading at JPY133.25, lower compared to JPY134.82.

Meanwhile, stocks in New York were higher at the London equities close, with the Dow Jones Industrial Average up 0.4%, the S&P 500 index up 0.5%, and the Nasdaq Composite up 1.1%.

US President Joe Biden said on Monday that "Americans can have confidence that the banking system is safe" as he vowed to push for tougher regulations on banks.

ING Analyst Chris Turner said that one "clear read" for markets amid the instability is that the Fed is not going to be able to deliver a 50 basis point hike on March 22 "if, at the same time, it is introducing new liquidity measures for the US banking system".

"The market has now scaled back expectations for this month's [Federal Open Market Committee meeting] to 25bp, with some high-profile names now calling unchanged rates. Indeed, the pricing of the December 2023 FOMC meeting is now 75bp lower than in the middle of last week," he said.

In London, banks were amongst the worst performers in the FTSE 100 on Monday as investors remained cautious amid the SVB crisis.

"Despite the best efforts of governments and regulators, the market was still very edgy on Monday as investors considered the fallout from SVB's collapse. There's plenty to worry about whether it be the conflict in Ukraine, inflation, rising interest rates and now a potential banking crisis has been added to the mix. Little surprise people are feeling a bit spooked," said Russ Mould, investment director at AJ Bell.

Barclays, Lloyds, NatWest finished 5.9%, 4.6%, and 4.4% lower, respectively.

HSBC shed 4.1% after it confirmed on Monday that it bought the UK arm of the failed US lender.

The Asia-focused lender said its ring-fenced UK subsidiary, HSBC UK Bank, has acquired Silicon Valley Bank UK, for the nominal price of GBP1.

According to HSBC, as of Friday, SVB UK had loans of around GBP5.5 billion, with deposits of around GBP6.7 billion. Its tangible equity is expected to be around GBP1.4 billion.

UK Chancellor Jeremy Hunt said on Twitter that the UK government and the Bank of England had "facilitated a private sale" of SVB UK to HSBC.

On Sunday, Hunt had warned the insolvency of SVB UK posed a "serious risk" to the UK's tech and science sectors, vowing a bring a plan forward "very quickly" to resolve the situation.

Shore Capital Analyst Gary Greenwood said the acquisition represented a "good solution for all."

"HSBC gains access to new customers in a fast-growing part of the market on attractive financial terms. Depositors will presumably be protected on the basis they are now part of a much larger and stable bank, which should provide comfort and access to much needed funds. Finally, this removes a headache for the UK regulator, demonstrating its ability to execute a swift resolution and so removing further risks to financial stability," Greenwood explained.

In the FTSE 250, Direct Line dropped 4.0% after it announced it swung to an annual loss in 2022, as it suffered the highest weather catastrophe costs since its listing.

Richard Hunter, head of markets at interactive investor, said the higher level of claims were part of an "annus horribilis" for the motor and home insurer, with regulatory reforms and the uncertainty of finding a new chief executive to tackle the overall issues "adding to the woes which Direct Line is facing."

The Bromley, London-based firm reported a pretax loss of GBP45.1 million in 2022, swinging from a pretax profit of GBP446.0 million in 2021.

Gross earned premiums fell by 1.1% to GBP3.13 billion from GBP3.17 billion a year ago.

The company's combined operating ratio was 106%, up from 90% in 2021. A combined operating ratio above 100% means a loss on underwriting. The combined operating ratio normalised for weather was 103%.

Elsewhere in London, Ricardo climbed 1.1% after it acquired a 90% interest in Melbourne, Australia-based water and natural resource advisory consultancy Aither for GBP17 million.

Chief Executive Graham Ritchie said: "With the acquisition of Aither, we will be able to expand our capabilities across the entire water value chain, as well as in natural resources, climate resilience and adaption - allowing Ricardo to serve a greater range of our clients' needs globally." Aither will be integrated into Ricardo's Australia operations.

In European equities on Monday, the CAC 40 in Paris ended 2.9% lower, while the DAX 40 in Frankfurt ended 3.0% lower.

Brent oil was quoted at US81.23 a barrel at the London equities close on Monday, down from USD83.02 late Friday.

Gold was quoted at USD1,904.07 an ounce, up sharply against USD1,859.42. The yellow metal benefited from a weaker dollar, with which it has an inverse relationship.

In Tuesday's UK corporate calendar, there are half-year results from Close Brothers, full-year results from Costain and Old Mutual and a trading statement from Pennon.

In the economic calendar, there are unemployment figures from the UK at 0700 GMT before the US publishes a CPI print at 1230 GMT.

By Heather Rydings, Alliance News senior economics reporter

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