Europe’s bank shares plunge, bonds rally despite SVB rescue effort

Article content

LONDON,SYDNEY — Europe’s bank shares suffered their biggest fall in over a year and bond markets saw a gigantic repricing of rate hike bets on Monday as global efforts to limit the fallout from the collapse of Silicon Valley Bank (SVB) failed to ease fears.

The dollar slid too as Wall Street heavyweights such as Goldman Sachs predicted the U.S. Federal Reserve would no longer lift interest rates next week, capping the biggest three-day rally for short-dated Treasuries since 1987.

Article content

Article content

Europe’s bank index tanked 6% having shed 3.8% on Friday. HSBC’s London listed dropped 1.45% after it said it would acquire the UK subsidiary of stricken Silicon Valley Bank for the token amount of 1 pound ($1.21).

Over the weekend, the Fed and U.S. Treasury announced a range of measures to stabilize the banking system and said depositors at SVB would have access to their deposits on Monday.

The Fed also said it would make additional funding available through a new “Bank Term Funding Program,” which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

Overnight in Asia, the ongoing concerns were seen in Japan’s Topix bank index which lost 4%, while Singapore’s largest banks also shed around 1%.

Article content

Article content

“We are seeing a classic flight to safety,” said Tom Caddick managing director at Nedgroup Investments. “Higher interest rates and a slowing economy was always going to bite.”

U.S. authorities have also taken over New York-based Signature Bank, the second bank failure in a matter of days.

Analysts noted that, importantly, the Fed would accept collateral at par rather than marking to market, allowing banks to borrow funds without having to sell assets at a loss.

Monday’s rout left more than 99% of companies listed on Europe’s benchmark STOXX 600 trading in the red. Only three stocks evaded the fall, Qinetiq, Reckitt and Vantage Towers, up 0.4%, 0.2% and 0.1%, respectively.

One glimmer of hope was that futures markets showed the Wall Street’s benchmark S&P 500 opening fractionally higher later.

Article content

A NEW HEADACHE FOR THE FED

Such was the concern about financial stability that investors speculated the Fed would now be reluctant to rock the boat by lifting interest rates by a super-sized 50 basis points next week – and might not even hike at all.

Fed fund futures surged to price out any chance of a half-point hike, compared with around 70% before the SVB news broke last week. Instead, futures implied around a 14% chance the Fed would stand pat.

The implied peak for rates came all the way down to 5.08%, from 5.69% last Wednesday, and markets were back to pricing in rate cuts by the end of the year.

“In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” wrote analysts at Goldman Sachs.

Article content

“We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June, and July and now expect a 5.25-5.5% terminal rate, though we see considerable uncertainty about the path.”

Such talk, combined with the shift to safety, saw yields on two-year Treasuries rise 7 basis points at 0958 GMT to 4.63%, a world away from last week’s 5.08% peak.

Yields were now down 66 basis points in just three sessions, a drop not seen since the Black Monday market crash in 1987.

Much will depend on what U.S. consumer price figures reveal on Tuesday, with an obvious risk that a high reading will pile pressure on the Fed to hike aggressively even with the financial system under strain.

The European Central Bank meets on Thursday and is still widely expected to lift its rates by 50 basis points and to flag more tightening ahead, though it will now have to take financial stability into account.

In currency markets, the dollar index, which measures the greenback’s value against a basket of currencies, fell 0.3%. The pound and euro both rose around 0.2% while the safe-have Japanese yen surged more than 1%.

Gold climbed almost 1% as well to $1,885 an ounce, having jumped 2% on Friday. Oil prices lost over 1.5% though with Brent back at 81.48 a barrel and U.S. crude at $75.28 per barrel. ($1 = 0.8296 pounds)

(Reporting by Nell Mackenzie; Editing by Dhara Ranasighe)