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US ‘credit crunch’ has started – Morgan Stanley

A chief strategist of the Wall Street bank has pointed to a big drop in lending amid tightening standards

The collapse of Silicon Valley Bank (SVB) and the ensuing banking crisis have triggered a credit crunch in the US, claims Morgan Stanley’s top stock strategist Mike Wilson. He pointed to data that shows a tightening of lending standards by financial institutions.

The warning comes over a month after massive deposit runs caused two lenders, Silicon Valley Bank and Signature Bank, to fail within days. A third lender, First Republic, ended up being the recipient of a $30-billion rescue from top Wall Street banks in the form of deposits. The big players stepped in over investor fears that First Republic would become the next institution to fail. 

In a note seen by Business Insider, Wilson said that lending levels have seen the steepest decline on record over the past two weeks. He attributes the drop to US banks’ attempts to offset the breakneck pace of deposit flight in the month since the collapse of SVB.

“The data suggest a credit crunch has started,” the analyst said in a Sunday note, noting that $1 trillion in deposits has been withdrawn from US lenders since the Federal Reserve began its series of rate hikes nearly a year ago.

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According to Wilson, major stock indexes holding steady since the failure of SVB should not be taken as an indication of recovery, but rather a sign that stocks are at risk of a sudden drop similar to what has been seen in small caps and bank stocks since March.

“To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for,” Wilson warned, pointing to the March Consumer Price Index report that revealed the inflation rate has been climbing less than projected.

“If/when revenues begin to disappoint, that margin degradation can be much more sudden, and that’s when the market can suddenly get in front of the earnings decline we are forecasting.”

In February, Wilson projected US stocks that had previously soared to unsustainable highs could crash 26% within months.

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April 18, 2023 at 06:30PM
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