Marketmind: Banks rescued, rates recoil, stress builds
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[March 13, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
U.S. regulators' swift weekend action to limit fallout from the failure
of Silicon Valley Bank has prompted one of the most extraordinary
recoils in borrowing costs in decades as investors re-assess the
implications of the sudden banking system stress.
With New York-based Signature Bank also shut down over the weekend,
marking both as the second and third biggest bank failures in U.S.
history, banking stocks round the world were hit hard - with questions
mounting about the effect on business confidence and the next direction
of monetary policy.
With shares in embattled Swiss lender Credit Suisse losing as much as
12% on Monday in the slipstream of U.S. events, bank stocks in the euro
zone and Japan fell more than 5%.
And the extent of the policy rethink means that futures markets now
think there's less than a 50% chance Federal Reserve will raise interest
rates at all this month. Early last week as much as a half point rate
hike was almost fully priced.
Now back as low as 4.8%, the implied peak Fed rate for the cycle has
plummeted almost a full percentage point over that time. An 85 basis
point recoil in 2-year Treasury yields to just 4.25% is the biggest
3-day fall since 1987's Black Monday stock market crash - exceeding
equivalent moves around the global banking bust of 2007/2008 or the
coronavirus pandemic.
Goldman Sachs now says it no longer expects the Fed to raise rates on
March 21-22.
While most experts seem to agree that the dramatic events of the past
week are not systemic for the banking system in the same way the Global
Financial Crisis unfolded 15 years ago - as the biggest banks are
sufficiently well capitalised - there are potential risks nonetheless in
a system reliant on confidence.
To cut across these, regulators at the weekend said SVB's customers will
have access to all their deposits starting Monday and set up a new
facility to give banks access to emergency funds. The Federal Reserve
also made it easier for banks to borrow from it in emergencies.
The new facility, the Bank Term Funding Program, will lend for up to one
year to any federally insured bank that is eligible for discount window
access, in return for eligible collateral including Treasuries and
agency securities.
Crucially, the collateral will be valued at par, with no haircut,
meaning banks can use bonds that are trading below book value without
having to realise any losses.
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A security worker reads a newspaper
inside of one the Signature Bank branches in New York City, U.S.,
March 12, 2023. REUTERS/Eduardo Munoz
Those unrealized bond losses, incurred over a year of relentless Fed
tightening and which were crystallised for SVB as it sold the
securities to meet deposit withdrawals, were at the heart of the
recent problem.
While most are not worrisome as they are held to maturity, total
unrealized losses in the U.S. system were estimated by the Federal
Deposit Insurance Corp most recently at $620 billion.
The implications for SVB's failure was almost equally dramatic in
Britain, where its subsidiary was wound up and sold to HSBC amid
concern for tech sector clients in the UK. HSBC's London-listed
shares were down 2.6% after it said it would acquire the UK arm of
SVB for 1 pound.
More broadly, the implications for Fed monetary policy caused most
ructions and complicated overall index direction that's torn between
bank losses and the repricing of rates.
The dollar was lower on the new Fed horizon, but concern about
possible contagion overseas also saw interest rate expectations
scaled back elsewhere too.
While some signs of loosening of the U.S. labor market last week and
Tuesday's U.S. consumer price inflation report for February remain
critical for Fed policy thinking, the banking stress now dominates.
And one question many investors will start to ask is whether the
latter will compromise the central bank's ability to act more
aggressively on inflation if necessary.
U.S. stock futures were slightly in the red on Monday - flipping
back and forth as jittery markets tried to settle on the most
important influence. The VIX 'fear index' was on the rise again to
27 first thing, just shy of the near 5-month high it hit on Friday.
Key developments that may provide direction to U.S. markets later on
Monday:
* Bank sector workouts and implications
* U.S. Feb employment trends
* Euro group finance ministers meet in Brussels
(By Mike Dolan; Editing by Toby Chopra; mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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