Investor Spotlight: collapse of Silicon Valley Bank rattles investors

It’s often said that the Fed hikes rates until something breaks.

In this week’s Investor Spotlight, we discuss the failure of Silicon Valley Bank (SVB) and four stocks to watch as the turmoil unfolds.

Silicon Valley Bank: a perfect storm

The crisis at Silicon Valley Bank has its origins in the US Federal Reserve’s hiking cycle. As any trader would be well aware, the US Federal Reserve has been on a 12-month-long fight against inflation, which has seen the central bank hike rates by a remarkable 450 basis points. It’s proven to be one of the most aggressive hiking campaigns in history, with market participants pricing in the non-trivial risk of a further 100 basis points of hikes to come.

Silicon Valley Bank has been hit from two sides. On the one hand, it has been impacted by reduced liquidity in the financial system and rising interest rates like any other bank - a situation that was exacerbated by catastrophic risk management failures.

On the other, it has borne the brunt of a US tech sector that has slowed amidst the rise in interest rates, as the economy adjusts from a very tech supportive “zero interest rate policy” regime to one where the cost of capital is much higher.

The problem for investors now is determining whether the SVB collapse is an isolated event, or one which signals deeper issues either in the US financial system or the US tech sector more broadly, both of which could have significant financial and economic implications.

Four stocks to watch following the SVB collapse

• JP Morgan

Every financial sector stock struggled last week as investors took a ‘shoot-first, ask-questions-later’ approach to the crisis. JP Morgan, as America’s biggest bank, is naturally one which has seen its share price fall. However, its stock was being driven by reports that it could effectively “bailout” SVB by acquiring the company.

JP Morgan shares plunged last week, as the broader financial sector sold-off, off before the stock found support around the 200-week MA. Sellers have taken control of the price upon any push above $145 resistance, while key support is around $125.

JP Morgan weekly chart

• Goldman Sachs

Goldman Sachs was one of the worst-performing Dow constituents on Friday, amidst the broad sell-off in financial stocks. Goldman Sachs' sensitivity to the situation is more indirect. However, given the institution is more focused on investment banking, the issue for investors is whether SVB’s troubles are indicative of a weaker investment and business backdrop for tech firms.

Momentum has shifted to the downside for Goldman Sach’s shares, with price breaking to the downside of an ascending wedge pattern. The stock has found support at just below $330 per share. But if that level breaks, a drop below $300 could open up. Resistance is around $360.

Goldman Sachs weekly chart

• Roku

Roku is one business that has direct exposure to SVB’s collapse. It has already notified the market that it has $487 million held at the bank, which represents around 26% of its cash and cash equivalents.

Roku shares have pulled back in recent days as the issues at SVB came to light. The stock is now testing upward-sloping trendline support, which if broken, may open a pullback to support at $46 per share. The 50-week moving average is acting as key resistance right now.

Roku weekly chart

• Roblox

Another company with deposits tied up at SVB is Roblox. The firm disclosed last week that it has around $150 million (5% of total cash) with the bank.

The drop in Roblox shares has been modest so far. However, aside from the issues associated with SVB, the company’s stock remains in a clear downtrend. In the short term, the price does appear supported by an upward-sloping trendline. Resistance appears to be around $46, while support is at $33 and $26 per share.

Roblox weekly chart