Europe's bank shares plunge, bonds rally despite SVB rescue effort
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[March 13, 2023] By
Nell Mackenzie and Wayne Cole
LONDON,SYDNEY (Reuters) - 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.
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 stabilise 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%.
"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.
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.
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Monitors displaying the stock index
prices and Japanese yen exchange rate against the U.S. dollar are
seen at the Tokyo Stock Exchange in Tokyo, Japan January 4, 2022.
REUTERS/Issei Kato/File Photo
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.
"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%. [/FRX]
Gold climbed almost 1% as well to $1,885 an ounce, having jumped 2%
on Friday. [GOL/] 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)
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