- US authorities act to stabilize banks
- Markets speculate on less aggressive Fed hikes
- Short-term Treasury yields fall, Fed futures jump
SYDNEY, March 13 (Reuters) – U.S. stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), while investors were betting that a rate hike this month was no longer a certainty.
Most Asian stock markets were slightly in the red, led by financials, while the dollar plunged as short-term Treasury yields extended their steep decline.
In a joint statement, the US Treasury and Federal Reserve announced a series of measures aimed at stabilizing the banking system and said SVB (SIVB.O) depositors would have access to their deposits on Monday.
The Fed said it would make additional funds available through a new bank term funding program, which would offer loans for up to a year to depository institutions, backed by Treasury bills and other assets held by these institutions.
The moves came as authorities took possession of New York-based Signature Bank (SBNY.O), the second bank failure in days.
Analysts noted that, crucially, the Fed would accept collateral at par rather than mark-to-market, allowing banks to borrow funds without having to sell assets at a loss.
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“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.
“Rationally, that should be enough to stop any contagion from spreading and destroying more banks, which can happen in the blink of an eye in the digital age,” he added. “But contagion has always been more of an irrational fear, so we stress there’s no guarantee it will work.”
Investors responded by sending US S&P 500 stock futures up 1.4%, while Nasdaq futures rose 1.5%. Both EUROSTOXX 50 and FTSE futures were little changed as markets wary of greater volatility.
MSCI’s broadest Asia Pacific ex-Japan equity index (.MIAPJ0000PUS) climbed 0.3% as investors pondered the implications for regional markets.
The Japanese Nikkei (.N225) fell 1.6% in choppy trade, while South Korea (.KS11) lost 0.5%.
Chinese blue chips (.CSI300) added 0.1% after Beijing surprised by keeping the central bank chief and finance minister in their posts on Sunday, prioritizing continuity as economic challenges loom at home and abroad.
A NEW HEADACHE FOR THE FED
Such was the concern over financial stability that investors speculated that the Fed would now be reluctant to rock the boat by raising interest rates by 50 basis points this month.
Fed funds futures jumped in early trading to imply just a 17% chance of a half-point rise, up from around 70% before the SVB announcement last week.
The peak in rates fell to 5.14%, against 5.69% last Wednesday, and the markets were even anticipating rate cuts by the end of the year.
“In light of the strains in the banking system, we no longer expect the FOMC to raise rates at its next meeting on March 22,” Goldman Sachs analysts wrote.
“We have left unchanged our expectation that the FOMC will make 25 basis point hikes in May, June and July and now expect a terminal rate of 5.25-5.5%, although we see a considerable uncertainty as to the trajectory.”
Those talks, combined with the move to safety, saw yields on two-year Treasuries fall another 12 basis points to 4.46%, a world away from last week’s peak of 5.08%.
However, longer-term yields rose and the curve steepened, with inflation remaining an obvious concern.
Everything will depend on what the US consumer price figures reveal on Tuesday, with an obvious risk that a high reading puts pressure on the Fed to increase aggressively even with the financial system under pressure.
The European Central Bank meets on Thursday and is still expected to hike rates by 50 basis points and announce further tightening, although it must now consider financial stability.
In the currency markets, the dollar plunged 0.6% on the safe haven Japanese yen to 134.20, although it was not its early low.
The dollar was down 0.4% against the Swiss franc, while the euro strengthened 0.5% to $1.0696 as US short-term yields fell.
Gold climbed 0.6% to $1,879 an ounce, after jumping 2% on Friday.
Oil prices fell slightly, with Brent down 24 cents to $82.54 a barrel, while U.S. crude fell 14 cents to $76.54 a barrel.
Reporting by Wayne Cole; Editing by Diane Craft and Sam Holmes
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