SVB’s collapse forces a rethink on interest rates and hits bank shares

Silicon Valley Bank’s failure has rippled through global markets, with investors revving up their forecasts for further rate hikes and dumping bank stocks around the world.

Treasury prices soared on Monday, with two-year U.S. Treasury yields recording their biggest one-day drop since 1987 as fund managers increased bets that the U.S. central bank would now leave interest rates unchanged at the next scheduled monetary policy meeting this month to stabilize the global financial system. As recently as last week, the markets were braced for another increase of half a percentage point.

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

Meanwhile, bank shares fell sharply. Shares of First Republic, another San Francisco-based bank, fell 65 percent before trading in its shares was halted shortly after the open despite a statement on Sunday that it had more than $70 billion. in unused liquidity.

Europe’s Stoxx banking index fell 7 percent, taking its decline since the middle of last week to just over 11 percent, 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. Austria’s Bawag Group fell 8.9 per cent.

SVB’s failure and the closure of Signature Bank come just months after the short-lived UK government bond crisis, underscoring the risks buried in the financial system that are coming to light as central banks remove the scale that shielded the markets after the outbreak of the Covid-19 pandemic. Investors and analysts said policymakers at the Fed and elsewhere would have to tread carefully as they tried to curb inflation.

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

Futures markets show investors believe the U.S. central bank will moderate the rate hike path from here, despite Fed Chairman Jay Powell’s reminder a week ago that he was determined to bring down inflation, and despite data on Friday showing the US economy added 311,000 jobs. , higher than the 225,000 forecast by economists.

After weeks of debate over whether the Fed would raise interest rates by 0.5 or 0.25 percent, Refinitiv data now shows traders see a 60 percent probability that the Fed will leave rates unchanged — for a range of 4.5-4.75 percent – later this month.

Goldman Sachs said on Monday it no longer expected a hike at the Fed’s meeting ending March 22 “in light of recent stress in the banking system”.

Investors also cut their bets on how high the European Central Bank would raise its deposit rate later this year to 3.25 percent, down from a peak of 4.2 percent last week.

The shake-up in the bond markets was significant. Germany’s interest-sensitive two-year bond yield fell 0.48 percentage point to 2.62 percent on Monday as bond markets rallied in response to fading expectations of further increases in borrowing costs. The rate has fallen from the 14-year high of 3.3 percent it hit last week, showing how sharply investors have readjusted their interest rate expectations since SVB’s collapse.

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

George Saravelos, a strategist at Deutsche Bank, said the SVB bailout from the Fed, which includes an offer to absorb government debt and mortgage bonds at above-market rates, represented a new form of quantitative easing — the bond-buying program that U.S. policymakers fired up after the pandemic hit to stabilize the financial system.

“Both the rate and end point of the Fed hiking cycle should decrease,” Saravelos said. “We’ve learned two things over the last few days. First, that this monetary policy tightening cycle operates with a lag, like all others. Second, that this tightening cycle will now be intensified due to stress in the US banking system. ”

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

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

Currencies that perform well in times of stress also rose. The Japanese yen and the Swiss franc both gained more than 1 percent against the dollar.

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

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

Additional reporting by Martin Arnold in Frankfurt

Video: Fractured markets: the major threats to the financial system

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