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US authorities act to stabilize banks
Markets speculate on less aggressive Fed hikes
Safe haven bonds and the Japanese yen are in demand
By Wayne Cole
SYDNEY, March 13 (Reuters) – U.S. stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), although investors still favor the safety of sovereign debt.
In a joint statement, the US Treasury and the Federal Reserve announced a series of measures aimed at stabilizing the banking system and said SVB depositors would have access to their deposits on Monday.
The Fed said it would make additional funds available through a new bank term funding program, which would offer loans for up to a year to depository institutions, backed by Treasury bills and other assets held by these institutions.
The moves came as authorities took possession of New York-based Signature Bank, the second bank failure in days.
Analysts noted that, crucially, 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.
“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.
“Rationally, that should be enough to stop any contagion from spreading and destroying more banks, which can happen in the blink of an eye in the digital age,” he added. “But contagion has always been more of an irrational fear, so we stress there’s no guarantee it will work.”
Investors responded by sending U.S. S&P 500 stock futures up 0.9%, while Nasdaq futures rose 1.1%.
Still, the concern over financial stability was such that investors speculated that the Fed would now be reluctant to rock the boat by raising interest rates by 50 basis points this month.
Fed funds futures jumped in early trading to imply just a 28% chance of a half-point rise, down from around 70% before the SVB announcement last week.
The peak in rates fell to 5.11%, against 5.69% last Wednesday, and the markets were even anticipating rate cuts by the end of the year.
That, combined with the move to safety, saw yields on two-year Treasuries plunge 47 basis points on Thursday and Friday to settle at 4.58%, a far cry from the week’s peak of 5.08%. last.
10-year Treasury bond futures added another 6 ticks on Monday, after rising more than 20 ticks at one point in early early trading.
“Accelerating your rate of increases in the face of a major bank failure may not be the wisest game for the Fed, especially if subsequent problems emerge stemming from similar root causes – underwater rate portfolios,” he said. said John Briggs, global head of economics at NatWest. Markets.
Still, much will hinge on what the US consumer price numbers reveal on Tuesday, with an obvious risk that a high reading puts pressure on the Fed to hike aggressively even with the financial system under pressure.
The European Central Bank meets on Thursday and is still expected to hike rates by 50 basis points and announce further tightening, although it must now consider financial stability.
On the foreign exchange markets, the dollar plunged 0.6% on the safe haven Japanese yen to 134.20, while yielding 0.6% on the Swiss franc. The euro strengthened 0.5% to $1.0698 as US yields fell.
Gold climbed 0.8% to $1,882 an ounce, after jumping 2% on Friday.
Oil prices rose slightly, with Brent up 10 cents to $82.88 a barrel, while U.S. crude rose 26 cents to $76.94 a barrel.
(Reporting by Wayne Cole; Editing by Diane Craft and Sam Holmes)