- Traders are revising rate hike expectations, giving Wall Street a boost
- Europe’s banking stocks plunge 6%, the biggest drop in over a year
- Short-term Treasury yields fall
NEW YORK/LONDON, March 13 (Reuters) – Global bank stocks and short-dated US Treasury yields fell on Monday as concerns about the fallout from the collapse of Silicon Valley Bank (SIVB.O) lingered despite actions by regulators.
The US dollar also fell. Gold and silver prices rallied on safe-haven buying.
Fixed income markets saw rate hike bets reassessed, with rising expectations for a pause in rate hikes or a lower rate hike.
The Dow Jones Industrial Average (.DJI) fell 90.50 points or 0.28% to 31,819.14, the (.SPX) lost 5.83 points or 0.15% to 3,855.76 and the (.IXIC) up 49.96 points, or 0.45%, to 11,188.84.
The MSCI world stock index (.MIWD00000PUS), which tracks stocks from 49 nations, lost 0.39%.
European stocks posted their steepest daily decline this year, with the pan-European STOXX 600 Index (.STOXX) ending down 2.3%.
The European banking index (.SX7P) fell almost 6% after losing 3.8% on Friday. London-listed HSBC (HSBA.L) fell after it announced it would acquire the UK subsidiary of the struggling Silicon Valley bank for a symbolic £1 (US$1.21).
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US regional bank shares fell, led by losses at First Republic Bank (FRC.N) as news of new funding failed to allay banks’ fears of contagion.
Switzerland’s financial regulator FINMA said on Monday it was trying to identify potential contagion risks for the country’s banks and insurers.
Over the weekend, the Fed and US Treasury announced measures to stabilize the banking system, saying depositors at SVB (SIVB.O) would be able to access their deposits on Monday.
The Fed also said it would provide additional funding through a new “bank term funding program” that would offer custodians loans with terms of up to one year backed by government bonds and other assets held by those institutions.
“We are witnessing a classic flight to safety,” said Tom Caddick, Managing Director at Nedgroup Investments. “Higher interest rates and a slowing economy would always bite.”
US authorities have also taken over New York-based Signature Bank (SBNY.O), its second bankruptcy in days.
Analysts said it’s crucial that the Fed accept collateral at face value, rather than marking it at market value, so banks can borrow money without having to sell assets at a loss.
HEADACHES FOR THE FED
Traders are no longer expecting a 50 basis point rate hike by the Federal Reserve next week and the current forecast is for a 25 basis point move, with some even expecting no rate hike at all, making non-yielding gold more attractive .
“Many of these Fed members are doves at heart, and I still expect significant inflationary pressures in the data points to come, which will complicate the picture for the Fed,” said Edward Moya, senior market analyst at data and analytics firm OANDA.
Moya pointed to February CPI data due Tuesday and PPI data due Wednesday.
federal fund
Goldman Sachs said in a note that its analysts no longer expect the Fed to come up with a rate hike at its next March 22 meeting. Others remained cautious.
Market volatility is likely to become more apparent once central banks, including the ECB, Fed and Bank of England, outline their next steps, said James Rossiter, head of global macro strategy at TD Securities in London.
“Other unaffected banks could take a risk-averse approach to lending that could tighten financial conditions and do some of the Fed’s work for them,” he said, adding that before rate decisions go quiet, central banks don’t able to steer the markets on their next move.
Short-dated US Treasury yields collapsed, pushing their prices up. The yield on the two-year note fell below 4% for the first time since last October and was on course for its biggest one-day decline since October 1987 in the wake of the Black Monday stock market crash.
Biggest three-day decline in UST yields since 1987
The European Central Bank, which meets on Thursday, is still widely expected to hike interest rates by 50 basis points and announce further tightening, although it now needs to take financial stability into account.
The dollar index, a measure of the greenback against six other currencies, slipped 0.6%. The euro rose by 0.8%.
The Mexican peso lost a whopping 3.7% amid a sell-off in Latin American currencies.
Gold rose with spot prices most recently up over 2.4% to their highest level since early February. US futures were up 2.6% to trade at $1,916.50.
Elsewhere in commodities, Brent crude futures fell $2.01, or 2.4%, to $80.77. The global benchmark earlier fell to a session low of $78.34, its lowest price since early January.
US West Texas Intermediate crude oil futures (WTI) CLc1 fell $1.88, or 2.5%, to $74.80 a barrel after previously hitting its lowest level since December.
($1 = 0.8296 pounds)
Reporting by Chris Prentice and Nell Mackenzie, additional reporting by Amruta Khandekar and Harry Robertson; Edited by Dhara Ranasighe, Ed Osmond and Barbara Lewis
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