The world of finance had its own version of March Madness as weaknesses in the global banking system got exposed.
It started when Silicon Valley Bank absorbed a USD 1.8 billion loss on its investments, causing a USD 42 billion bank run and making history as the second biggest bank failure in US history.
Throughout the month, the global stock markets shifted from one extreme to another. At the start, the US Federal Reserve spoke of further interest-rate hikes to reduce inflation. However, SVB’s collapse led the market into a panic, triggering a domino effect that caused shockwaves across the US and Europe.
Although bank regulators stepped in to prevent further turmoil, concerns persisted that banks had lost deposits or might clamp down on credit. As a result, there were fears of an economic slowdown, causing the market to shift from expecting interest rate hikes to an expectant decline. Bond prices increased, and yields fell as the market anticipated the Fed to reverse course in the year's second half.
Although uncertainties around the banking sector have subsided to some extent, the situation remains unpredictable. Despite a significant share price decline of 15% in large banks and 22% in regional banks, the S&P 500 index managed to achieve an almost 4% increase in March. On the other hand, the tech-heavy Nasdaq, recorded its strongest quarter since 2020; with a remarkable increase of almost 22%. The market instinctively followed the Wall Street playbook of investing in tech shares during an economic slowdown or any signs of one.
The recent March Madness serves as a prime example of how specific strategies can help you not only survive, but also capitalise on profitable trades while everyone else is panic-stricken. After all, one of the benefits of trading CFDs is that you can make the most from both rising and falling markets.
During a crash, most shares experience volatility, but it's uncommon for all shares to be negative. These shares can present valuable buying opportunities, and traders tend to flock to them. To identify these strong shares, it's important to stay informed about financial and economic events as well as broader global trends over time.
By analysing these factors, you can make more informed predictions about which markets are likely to rise or fall allowing you to open strategic trades. Paying attention to market indicators such as earnings reports, interest rates, and government policies can also help you identify emerging trends and opportunities. This time, the markets anticipated that the US Federal Reserve would pursue a less aggressive policy-tightening approach due to the emergence of some cracks in the banking sector.
Short selling and hedging are techniques that can be used to offset risk and take advantage of falling stock prices. Short selling involves selling borrowed shares with the hope of buying them back at a lower price, while hedging involves minimizing exposure to price fluctuations by having opposing positions in different assets.
Having strategic shorts in a portfolio can help offset losses in a market downturn and allow for reinvestment at lower prices. Note that the risk of losses still exists.
Another well-known strategy is to diversify. Diversification is a risk management technique used to reduce risk by spreading investments across different assets and directions. One way to diversify is by trading in a range of shares, but another way is to use Contract for Difference (CFD) to diversify across asset classes. CFDs offer an advantage because they do not require ownership of the underlying asset.
CFDs, or Contracts for Difference, are financial derivatives that allow traders to speculate on the price movements of underlying assets, such as shares, commodities, currencies, or indices, without owning the underlying asset.
When the banking sector crisis started, gold prices experienced a significant rally. This is due to a global sentiment that gold is considered investment during an economic crisis. The banking sector crisis led to a surge in demand for safe-haven assets such as gold and Treasury bonds. As a result, gold prices hit their highest levels in a year during March.
For those who were keeping a close eye on the global markets and remained nimble, a profitable trade would have been a long position in spot gold during this period. This is because fears of a repeat of the global financial crisis led to a surge in demand for gold, as it is seen as a safe asset to invest in during uncertain times. With this increased demand, gold prices rose and presented an opportunity for investors to profit from this trend.
Source: Infront Terminal
Tech emerges as a safe-haven
Traditionally, many cautious investors considered bank shares as safe havens during times of uncertainty because of their relatively low valuations. In contrast, tech shares were viewed as riskier due to their higher valuations. However, this dynamic has shifted with investors having come to appreciate that profitable technology companies have limited exposure to the financial sector, are flush with cash, and are benefitting from fast-growing trends such as artificial intelligence that won't be slowed down by a bank crisis.
During mid-March, we saw the downfall of several banks such as Silicon Valley Bank, Signature Bank, and Silvergate Bank. However, there was a significant rally in strong tech shares which received a boost from the news that the Biden administration would require TikTok to be sold or banned entirely if its Chinese owner did not exit their stakes. As a result, Meta's shares increased by 4%, while Snap and Pinterest shares saw gains of 4% and 7%, respectively.
However, the most significant factor driving tech shares returns in the past month was the significant decline in bond yields, as well as the expectation that the Fed will cut benchmark rates multiple times by the end of the year due to the fallout from the largest bank failure since 2008.
Tech shares vs Banks Q1 2023
Source: Infront Terminal
Investors who were able to look beyond the banking crisis and didn't let fear hold them back could have potentially made significant profits by taking long positions in certain tech shares, especially the mega-cap tech shares like Apple and Microsoft. These tech giants have performed well in the past and are expected to continue to do so, as banks face greater regulatory scrutiny and the market is filled with more uncertainty.
As the market adapts to these changes, investors who take a calculated risk and invest in tech shares may reap the benefits. In addition, the recent decline in bond yields and expectations of the Federal Reserve cutting benchmark rates multiple times by the end of the year could further boost tech shares returns. This is because tech shares are highly sensitive to changes in borrowing costs, and any decrease in rates may benefit their growth potential.
Overall, it's important for investors to keep an eye on market trends and adapt their investment or trading strategy accordingly. While the banking crisis may have caused panic in some, there were and still are profitable opportunities in the market for those who are willing to take a calculated risk and look beyond the immediate uncertainties.
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