Trading steadied in the US on Tuesday with indices climbing as fears over the knock-on effect following the failure of Silicon Valley Bank eased.
The Dow Jones (^DJI) rose 1.44% to 32,277 points, the S&P 500 (^GSPC) was up 2% to 3,932 points, while the tech-heavy NASDAQ (^IXIC) also rose 2.31% to 11,447.00.
Across the pond, the FTSE 100 edged lower on Tuesday while European stocks moved into the green as investors considered whether the collapse of Silicon Valley Bank (SIVB), Signature Bank (SBNY), and Silvergate (SI) would force the Federal Reserve to change course on interest rates.
The FTSE 100 (^FTSE) dropped 0.05% to 7,545 points at the open, while the CAC 40 (^FCHI) in Paris rose 0.18% to 7,023 points. In Germany, the DAX (^GDAXI) climbed 0.25% to 14,996.
Credit Suisse (CS) led the declines across European financials after the Swiss lender said it found "material weakness" in its internal financial reporting controls, adding to its woes.
Victoria Scholar, head of investment at Interactive Investor, said: “In a frenetic period for markets, European indices have started the session oscillating between gains and losses with the FTSE 100 trading lower while the DAX is currently in the green.
“Land Securities (LAND.L), British Land (BLND.L) and Rightmove (RMV.L) are among the outperformers on the UK index amid hopes of a dovish tilt from the Bank of England. Most European banks continue to face selling pressure with HSBC (HSBA.L) and Standard Chartered (STAN.L) near the bottom of the FTSE 100.”
Craig Erlam, a senior market analyst at OANDA, also noted that markets have drastically pared back interest rate expectations.
“The Fed may be concerned about financial stability and it may encourage it to question its decisions but inflation must be viewed to be on a path back to 2% or it will have to do more,” he said.
US and Asia
In Asia, Tokyo’s Nikkei 225 (^N225) lost 2.19% to 27,222 points, while the Hang Seng (^HSI) in Hong Kong dropped 2.46% to 19,210. The Shanghai Composite (000001.SS) also lost ground, falling 0.72% to 3,245 points.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “The expectation that the hiking cycle won’t now go quite so high in the US, did help the broader S&P index...but losses became entrenched during trading in Asia, with the fear factor spreading.
“Although immediate financial lifelines for tech start-ups around the world have been maintained, attention is now turning to how they will be able to secure fresh funding for the longer term, particularly with venture capital drying up and investors reeling from the Silicon Valley Bank shock.”
Read more: How Silicon Valley Bank skirted Washington's toughest banking rules
Danni Hewson, AJ Bell head of financial analysis, said the first rush of relief has been replaced by niggling concerns that the era of high rates might be more difficult for some banks to stomach than had been previously thought.
“There are bigger questions being asked than about the future of one or two vulnerable banks.
“Can the US economy remain resilient if the Fed goes further and faster with those interest rate hikes than had been priced in at the start of the year? Markets seem to be betting that question won’t need to be answered and that central bankers will be swayed by the current predicament and soften their approach to taming inflation.”
Read more: UK pay rises but fails to keep up with inflation
Scholar said traders are now pricing in a 50% chance of no change to interest rates in March, a significant climb down from expectations for a hike of between 25-50 basis points just last week.
“Nomura has gone a step further and is forecasting that the Fed could even cut interest rates next week in what would be a major U-turn in central bank policy. This has prompted significant volatility for the bond market with the two-year US treasury yield posting its biggest one-day drop since 1987 as bond prices rebound.”
Bank stocks
In London, banks continued to lead the losses across the blue-chip index, with Lloyds (LLOY.L) falling 0.82%, HSBC losing 1.79%, Barclays (BARC.L) declining 0.28% and NatWest (NWG.L) slipping 0.62%.
Streeter said: “A sea of red has descended on indices as banking stocks continue to be sideswiped in the wake of SVB’s collapse and worries reverberate about the tech sector’s fragility. Those niggling concerns that mild recessions could be on the way have been replaced by a wall of worry about runs on smaller banks like First Republic (FRC) and the risk that larger institutions may turn more risk averse to lending amid this volatility, prompting deeper downturns.
“Attention will be trained later on European banks, which were battered by worries about malaise spreading. Although the deposit backstops from US regulators have quelled fears of wide contagion in the financial sector, eye-watering falls in the share prices of smaller regional banks demonstrates the loss of shareholder confidence. Bigger banks are sitting on big unrealised losses in their bond portfolios, although they’re still considered unlikely to be forced to liquidate their bond holdings due to their stable deposit holdings, and greater capital buffers.
“The expectation is that banks will have to work a lot harder to attract customers, given this turn of events to stop them pulling their bank deposits to put money in other assets, with a higher rate of return like short term government bonds. They will need to retain deposits and attract more capital in, and this is set to have an impact on their net interest margins at a time when confidence is already being sideswiped.”
Oil markets
Meanwhile, the feared knock-on effect for the global economy has also shown up in the oil markets.
“Brent crude futures have dropped below $80 a barrel, to a level not seen since early February.”
Streeter also pointed out that gold prices, considered to be a hedge against economic uncertainty, were holding above $1900 an ounce, after jumping 2% on Monday.
Pound
The price of sterling (GBPUSD=X) dipped against the dollar on Tuesday, despite resilient UK jobs data.
However, it remained near its one-month high of $1.220 hit a day earlier.
GBP was 0.2% lower against the USD at $1.2156.
Traders will now be waiting for US consumer price data — due later on Tuesday — to see how that will impact the currency pair.
Watch: Former Wall Street banker reacts to banking collapse
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2023-03-14 10:44:29Z
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