- US authorities are acting to stabilize the banks
- Markets are speculating on less aggressive Fed hikes
- Short-term Treasury yields fall, Fed futures jump
SYDNEY, March 13 (Reuters) – U.S. stock futures rose in Asian trade on Monday as the government announced plans to contain the fallout from the collapse of Silicon Valley Bank (SVB), while investors bet a rate hike this month was no longer a certainty.
Most Asian stock markets were modestly in the red led by financials, while the dollar fell as short-term government yields extended a sharp decline.
In a joint statement, the U.S. Treasury Department and the Federal Reserve announced a series of measures to stabilize the banking system and said depositors at SVB ( SIVB.O ) would have access to their deposits on Monday.
The Fed said it will make additional funding available through a new Bank Term Funding Program, which will offer loans of up to one year to depository institutions, backed by government bonds and other assets held by those institutions.
The moves came as authorities seized New York-based Signature Bank ( SBNY.O ), the second bank failure in days.
Analysts noted that, most importantly, the Fed would accept collateral at par rather than mark to market, allowing banks to borrow funds without having to sell 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 stop any contagion from spreading and taking down more banks, which can happen in an instant in the digital age,” he added. “But contagion has always been more about irrational fear, so we want to emphasize that there is no guarantee that this will work.”
Investors responded by sending US S&P 500 stock futures up 1.4%, while Nasdaq futures rose 1.5%. EUROSTOXX 50 futures and FTSE futures were both little changed with markets wary of more volatility.
MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) edged up 0.3% as investors pondered the ramifications for regional markets.
Japan’s Nikkei (.N225) fell 1.6% in choppy trade, while South Korea (.KS11) lost 0.5%.
Chinese blue chips (.CSI300) rose 0.1% after Beijing surprised by keeping its 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 THE FED
Concerns about financial stability were so great that investors speculated the Fed would now be reluctant to budge by raising interest rates by a super-major 50 basis points this month.
Fed funds futures rose in early trade to suggest just a 17% chance of a half-point rise, compared with around 70% before the SVB news broke last week.
The peak for yields came all the way back to 5.14%, from 5.69%, last Wednesday, with markets pricing in even a year-end rate cut.
“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,” analysts at Goldman Sachs wrote.
“We have abandoned 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 significant uncertainty about the path.”
Such talk, combined with the move to safety, saw the yield on two-year Treasury bonds fall another 12 basis points to 4.46%, a world away from last week’s peak of 5.08%.
However, longer-term interest rates rose and the curve steepened as inflation remained a clear concern.
Much will depend on what US consumer price figures reveal on Tuesday, with an obvious risk that a high reading will put 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 raise interest rates by 50 basis points and signal more tightening ahead, although it must now take financial stability into account.
In currency markets, the dollar fell 0.6% on the safe haven Japanese yen to 134.20 , although that was off early lows.
The dollar fell 0.4% against the Swiss franc, while the euro gained 0.5% to $1.0696 as short-term US yields fell.
Gold climbed 0.6% to $1,879 an ounce, after jumping 2% on Friday.
Oil prices eased, with Brent down 24 cents to $82.54 a barrel, while US crude fell 14 cents to $76.54 a barrel.
Reporting by Wayne Cole; Editing by Diane Craft and Sam Holmes
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