LONDON, March 12 (Reuters) – Markets were set for a bumpy ride this week as the fallout from collapsed startup-focused lender Silicon Valley Bank (SVB), the biggest U.S. bank failure since the 2008 financial crisis, coincides with key economic data and political meetings.
Inflation figures for February in the US are released on Tuesday, followed by the UK budget on Wednesday and the European Central Bank’s interest rate meeting on Thursday.
“It’s a tough ride ahead,” said Pooja Kumra, senior European and UK rates strategist at TD Securities in London.
Volatility in the US stock market as measured by the “fear index”, the VIX (.VIX), had already risen on Friday to the highest since October, while the ICE BofA Move Index (.MOVE), a measure of volatility in the US fixed income market, rose to highest since mid-December.
Stock markets in the Middle East ended lower on Sunday, with the Egyptian bourse leading the decline. In Qatar, almost all stocks were in negative territory, including Qatar Islamic Bank ( QISB.QA ), which fell 3.9%.
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In another sign of possible spillover to other assets, stablecoin USD Coin (USDC) lost its dollar peg and fell to a record low on Saturday. It later recouped most of its losses after Circle, the firm behind it, assured investors it would honor the bond despite exposure to Silicon Valley Bank.
Still, the turmoil over the banking sector is likely to continue.
US Treasury Secretary Janet Yellen said on Sunday that she was working with regulators to respond to the implosion of SVB. But investors may enter Monday’s trading day with some time to digest the latest developments.
SVB could have a domino effect on other US regional banks and beyond. US regional and smaller bank stocks were hit hard on Friday. The S&P 500 index of regional banks ( .SPLRCBNKS ) fell 4.3%, bringing the week’s loss to 18%, its worst week since 2009.
POTENTIAL HIT
The British government struggled on Sunday to minimize the damage to the country’s technology sector. Prime Minister Rishi Sunak said the UK government was working to find a solution to limit the potential hit to businesses from the failure of SVB’s UK subsidiary.
Advisory firm Rothschild & Co is exploring options for the subsidiary as insolvency looms, two people familiar with the discussions told Reuters. The BoE has said it is seeking a court order to place the UK arm into insolvency proceedings.
In Asia, the SVB failure has left many Chinese funds and tech start-ups in the lurch, as the bank was a key financing bridge for groups operating between China and the United States, the Financial Times reported on Sunday.
The Chinese joint venture of SVB said on Saturday that it has a sound corporate structure and an independently run balance sheet.
After raising expectations for further interest rate hikes in the US and Europe, investors are considering whether turmoil in the banking sector could force central banks to reconsider.
Investors will be laser-focused on the ECB, which looks set to deliver another hefty rate hike on Thursday. A surprise rise in core inflation in February has made politicians concerned that price pressures may prove to be persistent.
The ECB will be alert to the risk of possible contagion and will ensure that there is ample liquidity in the system, said Marchel Alexandrovich, European economist and partner at Saltmarsh Economics.
And if there is a difficult week in the markets, ECB President Christine Lagarde “may deliver a somewhat more cautious message,” he said.
British Chancellor of the Exchequer Jeremy Hunt’s UK budget may be overshadowed by the SVB fallout in the UK. Hunt is expected to prioritize keeping the public finances stable and resisting gifts that could destabilize sterling, stocks or gilts.
But broad estimates for new government borrowing needs make the outlook for government bonds uncertain.
Reporting by Dhara Ranasinghe; Editing by Elisa Martinuzzi and David Holmes
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