After falling steeply from Covid era peaks, air freight prices finally seemed as if they might be reaching a bottom in March.
TAC Index, the leading price reporting agency (PRA) for air freight, reported successive weekly gains for the Baltic Air Freight Index (BAI00) of +3.1% in the week to 20 March and then another +0.7% in the week to 27 March, reducing the year-on-year decline to -34.2%.
There were as usual significant regional variations. After falling sharply in the past year, the outbound Shanghai (BAI80) index notched up successive weekly gains of +6.5% and then +5.6%, trimming its YoY decline to -35.9%.
Shanghai rates were boosted by an ‘end-of-quarter rush’ particularly in e-commerce and garments ahead of Easter, sources said, though they were also expecting prices to soften again.
Prices already were softer out of Hong Kong (BAI30) and Singapore (BAI60), which fell -1.3% and -1.9% respectively in the week to 27 March, leaving those indices lower by -28.2% and -23.7% YoY.
European rates, by contrast, were firmer with London (BAI40) up +3.1% and Frankfurt (BAI20) up +1.6% WoW – though leaving both still way lower YoY by -41.2% and -42.6%, respectively.
Some of the weakest markets in late March were in the Americas – with outbound Chicago (BAI50) dropping -8.4% WoW to leave it at -22.6% YoY.
Indeed, TAC data now shows US-China rates dropping back below historic pre-Covid levels of 2019.
Airline carriers had been hoping that with contracts agreed at Covid lockdown highs expiring or getting renegotiated, the market might find a new bottom – perhaps around 1 April, a date when many block space agreements (BSAs) get renegotiated.
The global macro backdrop had also been looking more positive – with energy prices easing, not only in crude oil but also natural gas in Europe, which spiked to extraordinary levels when Russia invaded Ukraine.
After a prolonged period when the ‘crack spread’ between crude oil and refined products was also elevated, the falls in crude have also finally fed through to jet fuel too.
After dropping -9.1% in the last month, jet fuel was lower by -36.6% in the year to 24 March, according to Platt’s data – more in line with the decline in air freight prices, which should help ease the pressure on margins for carriers.
Lower prices for energy and transport should help ease inflationary pressures generally. Even though inflation looks ‘stickier’ in services than in goods or commodities, many economists anticipate it to fall sharply – perhaps back to 3% or even lower in Europe by end-year.
That in turn should ease pressure on central banks to push interest rates up much further.
Taken together, all these factors were making many commentators at least cautiously optimistic a recession could be avoided – or that at worst it might be shallow and short-lived.
Hence the sudden collapse of Silicon Valley Bank (SVB) and some other smaller banks in the US, rapidly followed by the rescue of Credit Suisse (CS) by its long-time rival UBS in Switzerland, came as something of a shock.
At a stroke, these events revived unwelcome memories of the global financial crisis (GFC) of 2008 – and questions about whether we are in for a repeat.
Of course, as in 2008, a major problem with the financial system would have widespread consequences for the real economy – with air freight likely to be among the first sectors to show symptoms.
At first glance, the prospect of a new banking crisis seems counter-intuitive. Indeed, until recently, many investment managers had been betting on a rise in bank profits – and share prices.
In the immediate aftermath of recent developments, they have been scrambling instead to work out whether the problems with SVB and CS were idiosyncratic – to do with specific issues for those banks – or whether they might be systemic, which would signal a much bigger problem.
Some of the issues in both cases do seem specific. SVB, for instance, was very focused on the tech sector – and arguably a victim of its own success when tech boomed during the pandemic, dramatically boosting its deposit base.
SVB then got wrong-footed by the rapid, explosive rise in interest rates – which causes bond prices to fall – and inversion of the yield curve. With short term rates to pay on its deposits rising well above longer-term earnings on its Treasury bond holdings, SVB suddenly faced a classic liquidity mis-match – and an estimated $16 billion of unrealised losses.
It is quite likely that plenty of other US banks will have fallen into the same trap – though hopefully not to anything like the same extent.
In the case of Credit Suisse, its travails were ironic in various ways – not least as, back in 2008, it was one of the biggest beneficiaries of the GFC when hedge funds and other clients pulled business away from US investment banks like Lehman Brothers.
But CS squandered that windfall over the following years with a long series of mis-steps including massive losses on trading with Archegos, a family office run by former Tiger Asia hedge fund manager Bill Hwang.
In the aftermath, it is not surprising market attention has turned to other banks that were also beneficiaries of 2008, such as Deutsche Bank.
Following the CS debacle, the share prices of Deutsche, UBS and others wobbled as investor confidence was shaken.
That said, it should be stressed that risk management, capital requirements and regulatory controls are undoubtedly much tougher now for banks than they were pre-2008.
Only time will tell, and problems at other banks may emerge. But this time we should be far from facing such a huge systemic problem.