- US authorities act to stabilize banks
- Markets are speculating on less aggressive Fed hikes
- Short-term Treasury yields fall, Fed futures jump
SYDNEY, March 13 (Reuters) – U.S. stock futures rose in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), while investors bet a rate hike this month was no longer a certainty .
The dollar fell as Goldman Sachs predicted the U.S. Federal Reserve would not raise interest rates again next week, capping the biggest gain for short-term Treasuries since 1987.
The wild sea change in markets came after the Fed and the U.S. Treasury Department announced a series of measures to stabilize the banking system and said depositors at SVB ( SIVB.O ) would have access to their deposits on Monday.
The Fed said it would make additional funding available through a new Bank Term Funding Program, which will offer loans of up to one year to depository institutions, backed by government bonds and other assets held by those institutions.
See 2 more stories
The moves came as authorities seized New York-based Signature Bank ( SBNY.O ), the second bank fall in as many days.
Analysts noted that most importantly, the Fed would accept collateral at par rather than market value, allowing banks to borrow money without having to sell assets at a loss.
“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.
“Rationally, this should be enough to prevent any contagion from spreading and shutting down more banks, which can happen in an instant in the digital age,” he added. “But contagion has always been more about irrational fear, so we want to emphasize that there is no guarantee that this will work.”
Investors responded by sending US S&P 500 stock futures up 1.8%, while Nasdaq futures rose 1.9%. EUROSTOXX 50 futures strengthened 0.4%, and FTSE futures 0.1%.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) rose 1.3%, helped by gains in China.
Chinese blue chips (.CSI300) added 0.8% after Beijing surprised by keeping its central bank chief and finance minister in their posts on Sunday, prioritizing continuity as economic challenges loom at home and abroad.
Japan’s Nikkei (.N225) fell 1.6% in choppy trade, while South Korea (.KS11) rose 0.3%.
A NEW HEADACHE FOR FED
Concerns about financial stability were so great that investors speculated that the Fed would now be reluctant to budge on raising interest rates by a super-sized 50 basis points next week – and might not raise at all.
Fed funds futures rose to price any chance of a hike at half a point, compared to around 70% before the SVB news broke last week. Instead, futures implied about an 18% chance that the Fed would stand still.
The implied peak for rates came all the way down to 5.06% from 5.69% last Wednesday, and markets were back to pricing in year-end rate cuts.
“Given the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” analysts at Goldman Sachs wrote.
“We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June and July, and now expect a terminal rate of 5.25-5.5%, although we see significant uncertainty about the path.”
Such talk, combined with the shift to safety, sent yields on two-year Treasuries down another 22 basis points to 4.36%, a world away from last week’s peak of 5.08%.
In fact, yields had now fallen 71 basis points in just three sessions, a drop not seen since the Black Monday market crash of 1987.
However, longer-term interest rates rose and the curve steepened as inflation remained a clear concern.
Much will depend on what the US consumer price figures reveal on Tuesday, with an obvious risk that a high reading will put pressure on the Fed to hike aggressively even with the financial system under pressure.
The European Central Bank meets on Thursday and is still widely expected to raise its interest rates by 50 basis points and flag more tightening ahead, although it will now have to factor in financial stability.
In currency markets, the dollar fell 0.9% against the safe-haven Japanese yen to 133.78 and 0.6% against the Swiss franc. The euro gained 0.8% to $1.0735 as short-term US yields fell.
Gold rose nearly 1% to $1,885 a barrel. ounce, after rising 2% on Friday.
Oil prices fluctuated from down to up, with Brent adding 20 cents to $82.98 a barrel. barrel, while U.S. crude rose 26 cents to $76.94 a barrel. barrel.
Reporting by Wayne Cole; Editing by Sam Holmes and Jacqueline Wong
Our standards: Thomson Reuters Trust Principles.