- US authorities are working to stabilize banks
- Markets anticipate less aggressive Fed hikes
- Short-term Treasury yields fall, Fed futures jump
SYDNEY, March 13 (Reuters) – U.S. stock futures rallied in Asian trade on Monday as officials announced plans to contain the fallout from Silicon Valley Bank’s (SVB) decline, while investors held off on a rate hike this month.
Most Asian stock markets were modestly red with financial stocks, while the dollar fell as short-term Treasury yields extended their steep decline.
In a joint statement, the U.S. Treasury and Federal Reserve Bank announced several measures to stabilize the system and said depositors at SVB ( SIVB.O ) could access their deposits on Monday.
The central bank said it would make additional funding available through a new bank term financing program, which would provide loans of up to one year to depository institutions, backed by Treasuries and other assets held by these institutions.
A second bank failure came within days as authorities seized New York-based Signature Bank ( SBNY.O ).
Crucially, analysts noted that the central bank would accept collateral rather than mark to market, allowing banks to borrow without selling assets at a loss.
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“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.
“Rationally, this should be enough to prevent any contagion and further de-banking that could happen in the blink of an eye in the digital age,” he added. “But the pandemic is always about irrational fear, so we would emphasize that there is no guarantee that this will work.”
Investors reacted by sending US S&P 500 stock futures up 1.4%, while Nasdaq futures rose 1.5%. Both EUROSTOXX 50 futures and FTSE futures were little changed, with markets wary of higher volatility.
MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) rose 0.3% as investors weighed the outcome of regional markets.
Japan’s Nikkei (.N225) fell 1.6% in trade, while South Korea (.KS11) lost 0.5%.
Chinese blue chips (.CSI300) added 0.1% as Beijing surprised the central bank chief and finance minister in their posts on Sunday, prioritizing continuity as economic challenges loom at home and abroad.
A new headache for central banks
Worried about financial stability, investors speculated that the Fed would be reluctant to rock the boat now by raising interest rates by a super-sized 50 basis points this month.
Fed fund futures in early trade indicated just a 17% chance of a half-point rise, compared with 70% before the SVB news emerged last week.
The peak for rates was 5.14% from 5.69% last Wednesday, and markets were pricing in rate cuts by the end of the year.
“In light of the pressure on the banking system, we do not expect the FOMC to offer a rate hike at its next meeting on March 22,” analysts at Goldman Sachs wrote.
“We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June and July, and now expect a terminal rate of 5.25-5.5%, although we see considerable uncertainty along the path.”
Such talk, combined with a shift to safety, saw yields on two-year Treasuries slip another 12 basis points to 4.46%, a world away from last week’s peak of 5.08%.
However, the curve steepened as long-term yields rose and inflation became a clear concern.
Depending on what U.S. consumer price data reveals on Tuesday, a higher reading is an obvious risk of piling pressure on the central bank, even as the financial system is in crisis.
The European Central Bank meets on Thursday and is still widely expected to raise rates by 50 basis points and tighten further, although it must now take financial stability into account.
In currency markets, the dollar fell 0.6% to 134.20 against the safe-haven Japanese yen, although that was off its early lows.
The dollar fell 0.4% against the Swiss franc, while the euro rose 0.5% to $1.0696 and short-term U.S. yields fell.
Gold rose 2% on Friday and rose 0.6% to $1,879 an ounce.
Oil prices fell, with Brent down 24 cents at $82.54 a barrel, while U.S. crude was down 14 cents at $76.54 a barrel.
Reporting by Wayne Cole; Editing by Diane Croft and Sam Holmes
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