US Banks Collapse: Could the US bank crisis be blessing in disguise for Nifty bulls, OR are we heading back to 2008?

A week after Silicon Valley Bank and Signature Bank failed, First Republic Bank is considering a sale following a dramatic 60 percent drop in its stock price over the past week. The bank also received $70 billion in emergency loans from JP Morgan Chase and the Federal Reserve.

Eleven of the biggest U.S. banks Thursday announced a $30 billion rescue package for First Republic Bank in an effort to prevent it from becoming the third to fail in less than a week and head off a broader banking crisis.

The rescue package brought back memories of the 2008 financial crisis, when banks collectively came to the aid of weaker banks in the early days of the crisis. Banks then bought each other in hurried deals in order to keep the crisis from spreading further.

With FIIs pulling out more dollars from India after back-to-back collapse of three US banks, including Signature and Silvergate, the ripple effect is loud and clear.

Market insiders, however, have started noticing the silver lining in the dark clouds hovering over the US banking system in the aftermath of the Silicon Valley Bank crisis. Here are three reasons:

1) Taming the Fed
The single biggest impact of the banking crisis is that it might force the US Federal Reserve to end its rate hike cycle. While Goldman expects the Fed to keep rates on hold at its March 21-22 meeting, Nomura has gone a step further in predicting that Powell may cut the benchmark interest rate by 25 basis points and stop reducing the size of its balance sheet.

Fed needed a trigger to stop hiking rates. A pause by the Fed will also comfort RBI to maintain the status quo in its April meeting. 

2) Fall in crude prices

The SVB episode has sparked fears of a financial crisis leading to a drop in crude oil price. While WTI sank to its lowest level since December, Brent dipped to its lowest level since early January. As India imports most of its oil requirements, a fall in crude oil rates is seen as a positive for India.

The uncertainty surrounding the rate hike decision, coupled with inventories that are expected to remain high, crude prices are expected to remain under pressure.

3) Bond yields

Both the US 2-year and 10-year bond yields have cooled down from levels before the SVB episode. The US 2-year yields saw its biggest decline since the 1980s, tumbling more than a percentage point in three days.

The disruptive development in the US banks and slowing economy have created a precursor to presume that yields will peak in the near future, supported by a change in monetary policy from hawkish to neutral, which will diminish the worries of long-term investors.

With the growing stress in the banking sector has boosted the odds of a US recession within the next 12 months. The bank now believes that the American economy has a 35% chance of entering a recession within a year, up from 25% before the banking sector meltdown started.

The world’s second-biggest economy, China, is also sputtering despite a burst of activity following the rapid ending of draconian Covid lockdown measures late last year.

In a surprise move Friday, the Chinese central bank cut the amount of money the country’s lenders are required to hold in reserve in a bid to keep cash flowing through the economy.