The collapse of Silicon Valley Bank rocks the ASX

What we witnessed in the Australian stock market on Tuesday was investor recognition, with shares in economically sensitive banks and energy companies taking the brunt.

Bank stocks leading the stock market down have dived in the past few sessions – Commonwealth Bank shares were hit more than 3 percent, ANZ lost 4.8 percent, National Australia Bank more than 5 percent and Westpac lost 3, 3 percent cents.

Fears of a slowing economy and a slump in oil prices also caused energy stocks to take a hit, with Santos falling 3 percent, Whitehaven Coal 5.3 percent and Woodside Energy down 3.4 percent.

Australia’s regional banks were hardest hit by the financial sell-off – in part because they are considered riskier than the big four.

Banks are traditionally a barometer of economic activity. If lending is restricted or the housing market becomes more vulnerable or net interest margins come under pressure, bank profits will be hurt.

Nobody seriously believes that Australian banks are threatened by the kind of strife that has hit some banks in the US. These banks lacked both regulatory controls and risk management. Additionally, they delved into very niche sectors such as small tech venture capital and crypto.

These characteristics are in no way replicated by Australian banks. So time will tell if investor treatment of the banking sector was overdone this week.

The bigger question is whether the RBA will see US volatility as sufficient evidence that external forces will slow down our economy enough to avoid having to continue relentless monetary tightening.

In other words, will the aftermath of the collapse of some specialty banks in the US ultimately help slow Australia’s economy?

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One would think that’s what RBA Governor Philip Lowe dreams of.

Economists are divided over whether the RBA’s inflationary war has received just enough fresh arsenal. Those who already thought the Reserve Bank was raising interest rates as high as needed are looking to events in the US as further evidence that their board will do serious damage if it continues to raise interest rates.

The logic here is that excessive tightening creates a whole new set of problems that the RBA will eventually need to solve – not the least of which is rising unemployment.

Economic data released over the past few weeks have shown clear signs that inflation is gradually slowing down but remains very high.

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Some economists are predicting the RBA will hike rates again, but there’s an increasing likelihood it will pause next month.

However, the financial markets have spoken clearly. They predict interest rates will peak below 4 percent, while a week ago they predicted an end rate above 4 percent.

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