SYDNEY, March 13 (Reuters) – Markets were set for a bumpy ride this week as the fallout from the collapse of startup-focused lender Silicon Valley Bank (SVB), the biggest collapse of a US bank since the 2008 financial crisis, coincide with important economic data and political meetings.
S&P500 futures rose 1.4% after US authorities guaranteed SVB customers access to their deposits from Monday. Futures later fell, up 0.7%
“No losses related to the dissolution of Silicon Valley Bank will be borne by the taxpayer,” said a statement from the U.S. Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
In Australia, the first major market to start trading in Asia-Pacific, the S&P/ASX200 (.AXJO) lost 0.3% in early trade.
“What investors have to expect tomorrow and beyond is that we will be dealing with a large event risk,” said Michael Purves, chief executive officer at Tallbacken Capital Advisors in New York.
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“There will still be outstanding issues with other regional banks. In such a scenario, it is difficult not to expect interest rate volatility to remain very high.”
US February inflation numbers are due out on Tuesday, followed by the UK budget on Wednesday and the European Central Bank interest rate meeting on Thursday, adding to risk factors for the markets.
“We have a rough ride ahead of us,” said Pooja Kumra, senior rates strategist for Europe and the UK at TD Securities in London.
US stock market volatility, as measured by the “fear index,” the VIX (.VIX), had already risen to its highest level since October on Friday, while the ICE BofA Move Index (.MOVE), a measure of volatility in the US bond market rose to its highest level since mid-December.
Middle East stock markets closed lower on Sunday, with the Egyptian bourse leading the declines. In Qatar, almost all stocks were in negative territory, including Qatar Islamic Bank (QISB.QA), which fell 3.9%.
In another sign of potential contagion to other assets, stablecoin USD Coin (USDC) lost its dollar peg and plunged to all-time lows on Saturday. It later recouped most of its losses after Circle, the company behind it, assured investors it would honor the peg despite its exposure to Silicon Valley Bank.
Nonetheless, concerns about the banking sector are likely to persist.
Investors head into Monday’s trading day with little time to digest the latest developments.
The SVB could have a domino effect on other US regional banks and beyond. Regional and smaller US bank stocks were hit hard on Friday. The S&P 500 regional banking index (.SPLRCBNKS) fell 4.3%, taking its weekly loss to 18%, its worst week since 2009.
POTENTIAL HIT
The British government tried on Sunday to minimize the damage to the country’s technology sector. Prime Minister Rishi Sunak said the UK government is working to find a solution to limit the potential impact on businesses stemming from the collapse of SVB’s UK subsidiary.
Consulting firm Rothschild & Co is reviewing options for the subsidiary as bankruptcy looms, two people familiar with the discussions told Reuters. The BoE has announced it will seek a court order to place the UK arm in bankruptcy proceedings.
In Asia, the failure of the SVB has left many Chinese funds and tech start-ups in the lurch as the bank has been a key funding bridge for China-US corporations, the Financial Times reported on Sunday.
SVB’s Chinese joint venture said Saturday it has a solid corporate structure and an independently managed balance sheet.
With expectations for further interest rate hikes ramping up in the US and Europe, investors are considering whether the turmoil in the banking sector could force central banks to rethink.
Investors will focus on the ECB, which is expected to make another sharp rate hike on Thursday. A surprise rise in underlying inflation in February prompted policymakers to worry that price pressures could prove persistent.
The ECB will be alert to the risks of possible contagion and ensure there is ample liquidity in the system, said Marchel Alexandrovich, European economist and partner at Saltmarsh Economics.
And should there be a difficult week in the markets, ECB President Christine Lagarde could “send a slightly more cautious message,” he said.
UK Treasury Secretary Jeremy Hunt’s budget could be overshadowed by the fallout from the UK’s SVB. Hunt is expected to prioritize keeping public finances stable and resist any giveaways that could destabilize sterling, equities or gilts.
But broad estimates of the need for new public credit make the outlook for government bonds uncertain.
Reporting by Dhara Ranasinghe in London; Additional reporting by Ira Iosebashvili in New York and Scott Murdoch in Sydney. Edited by David Holmes, Diane Craft, Lisa Shumaker and Lincoln Feast.
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Scott Murdoch
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