SVB collapse forces interest rate rethink and hits bank stocks

The failed Silicon Valley Bank slumped in global markets, with investors tearing up expectations of further interest rate hikes and dumping bank stocks around the world.

Government bond prices soared on Monday, with two-year U.S. Treasury yields posting their biggest one-day drop since 1987, as fund managers stepped up bets that the U.S. Federal Reserve would now leave interest rates unchanged at its next monetary policy meeting scheduled for this month. to stabilize the global financial system. As recently as last week, markets were bracing for another half-percentage-point rise.

Wall Street’s S&P 500 and the tech-heavy Nasdaq Composite fell 1% and 0.8% respectively shortly after the New York open, giving up earlier gains after U.S. regulators said on Sunday that SVB depositors would be fully reimbursed and unveiled emergency funding. measures to contain the fallout. In the UK, the Bank of England brokered a deal to sell the UK branch of SVB to HSBC for £1.

Meanwhile, bank stocks fell sharply. Shares of First Republic, another San Francisco-based bank, fell 65% before trading in its shares was halted shortly after opening despite a statement on Sunday that it had more than $70 billion in assets. idle cash.

Europe’s Stoxx banking index fell 7%, taking its decline since the middle of last week to just over 11%, with all 22 stocks in the index in negative territory. Several lenders suffered double-digit declines on Monday alone, including Spain’s Banco Sabadell and Germany’s Commerzbank. The Austrian group Bawag fell by 8.9%.

The failure of SVB and the closure of Signature Bank came just months after the short-lived crisis in UK government bonds, underscoring the risks buried in the financial system that are emerging as central banks remove the largesse that protected markets after the outbreak of the Covid-19 Pandemic. Investors and analysts said policymakers at the Fed and elsewhere should tread carefully as they seek to bring inflation down.

“SVB’s situation is a reminder that Fed hikes are having an effect, even though the economy has been resilient so far,” Mark Haefele, chief investment officer at UBS Global Wealth Management said in a note to clients. “Worries about bank earnings and balance sheets are also adding to negative sentiment for . . . stock markets.”

Futures markets show investors believe the U.S. central bank will temper the path of interest rate hikes from here, despite Fed Chairman Jay Powell’s reminder a week ago of his determination to reduce inflation, and despite Friday’s data showing the US economy added 311,000 jobs. , higher than the 225,000 predicted by economists.

After weeks of debate over whether the US central bank would raise interest rates by 0.5 or 0.25%, data from Refinitiv now shows traders see a 60% chance that the central bank US leaves rates unchanged – in a range of 4.5 to 4.75. percent – ​​later this month.

Goldman Sachs said Monday it expects no further increases at the Fed meeting that ends March 22 “in light of recent strains in the banking system.”

Investors also cut their bets on the level at which the European Central Bank would raise its deposit rate later this year to 3.25%, from a peak of 4.2% just last week.

The upheaval in bond markets has been substantial. The yield on interest-rate-sensitive two-year German bonds fell 0.48 percentage points to 2.62% on Monday, as bond markets rallied sharply in response to fading expectations of a further increase in borrowing costs. The rate fell from a 14-year high of 3.3% hit last week, showing how much investors have revised their rate expectations since SVB’s collapse.

In the US, the two-year Treasury yield, which moves with interest rate expectations, fell 0.41 percentage points to 4.18%. It had previously slipped below 4% to its lowest level since September. The yield on the benchmark 10-year government bond slipped 0.22 percentage points to 3.47%.

Deutsche Bank strategist George Saravelos said the Fed’s SVB bailout, which includes an offer to absorb government debt and mortgage-backed bonds at above-market prices, represented a new form quantitative easing – the bond-buying program that U.S. policymakers unleashed after the pandemic to stabilize the financial system.

“The speed and endpoint of the Fed’s hike cycle should go down,” Saravelos said. “We have learned two things over the past few days. First, that this cycle of monetary policy tightening works with a lag, like all the others. Second, that this tightening cycle will now be amplified due to strains in the US banking system.

Rabobank analyst Michael Every said the implications of the “Fed bailout of Silicon Valley venture capitalists funding Instagram filters that make cats look like dogs” were potentially “huge”.

“The Fed is de facto allowing a massive easing of financial conditions as well as a spike in moral hazard,” he said in a note to clients.

Currencies that perform well in times of stress have also rallied. The Japanese yen and Swiss franc both climbed more than 1% against the dollar.

SVB’s rapid collapse has made market participants “more aware that eventually the Fed will break something if it keeps raising rates,” said Lee Hardman, currency analyst at MUFG.

The bank’s collapse also “cut the sails of the US dollar” by highlighting the risks associated with rising rates, Hardman added. A measure of dollar strength against a basket of six international peers fell 0.6% on Monday.

Additional reporting by Martin Arnold in Frankfurt

Video: Fractured Markets: Big Threats to the Financial System

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