UPDATE 11-Oil slumps $5/bbl to lowest in more than a year as banking fears mount

Crude benchmarks extend losses, hit lowest since Dec. 2021

Credit Suisse unease sparks global sell-off

U.S. crude stockpiles build more than expected

China reopening expected to boost oil demand -IEA

Updates with settlement price, comment

By Arathy Somasekhar

HOUSTON, March 15 (Reuters) – Oil prices plunged more than $5 a barrel on Wednesday to their lowest in more than a year as unease over Credit Suisse spooked world markets and offset hopes of a Chinese oil demand recovery.

Early signs of a return to market stability faded after Credit Suisse’s largest investor said it could not provide the Swiss bank with more financial assistance, sending its shares and other European equities sliding.

“It doesn’t matter what your risk asset is: at this point people are pulling the plug across different instruments here,” said Robert Yawger, director of energy futures at Mizuho in New York.

“Nobody wants to go home with a big position on anything today. … You have nowhere to hide really.”

Both crude benchmarks hit their lowest since December 2021 and have fallen for three straight days.

Brent crude LCOc1 was down $3.76, or 4.9%, to $73.69 a barrel. U.S. West Texas Intermediate crude (WTI) CLc1 was down $3.72, or 5.2%, at $67.61, breaking through technical levels of $70 and $68 and extending the sell-off.

Volatility in Brent and WTI was at its highest in more than a year and both entered technically oversold territory on Wednesday.

On Tuesday, both benchmarks shed more than 4%, pressured by fears that the collapse of Silicon Valley Bank (SVB) last week and other U.S. bank failures could spark a financial crisis that would weigh on fuel demand.

Hedge funds were liquidating due to rising interest rates and economic uncertainty, said Dennis Kissler, senior vice president of trading at BOK Financial, adding that heavy pressure on U.S. stocks early Wednesday was adding to the fund liquidation in crude.

The U.S. dollar =USD also strengthened against a basket of currencies, making it more expensive for holders of those currencies to purchase crude. USD/

Adding to the bearishness in the market, U.S. crude stockpiles USOILC=ECI rose by 1.6 million barrels last week, government data showed, more than the expected rise of 1.2 million barrels in a Reuters poll of analysts.

Stacey Morris, head of energy research at data analytics company VettaFi, said oil prices would remain weak in the short term, given current uncertainty, adding that there may be a buying opportunity.

Oil had rallied earlier in the session on figures showing that China’s economic activity picked up in the first two months of 2023 after the end of strict COVID-19 containment measures.

Wednesday’s monthly report from the International Energy Agency provided support by flagging an expected boost to oil demand from China, a day after OPEC increased its Chinese demand forecast for 2023.

“We definitely have seen the oil market separate themselves from oil inventories and we’re more focused on a larger meltdown of the global economy,” said Phil Flynn, an analyst at Price Futures Group.

(Reporting by Alex Lawler; Additional reporting by Florence Tan in Singapore and Yuka Obayashi in Tokyo; Editing by Alexandra Hudson, Mark Potter and Richard Chang)

((alex.lawler@thomsonreuters.com; +44 207 542 4087; Reuters Messaging: alex.lawler.reuters.com@reuters.net))

Door slams on Japan bank rally as focus turns to bond holdings in wake of SVB

SINGAPORE, March 14 (Reuters) – Tokyo banking stocks stood within sight of decade highs last week, testing the top of a range that has bound them since the 2008 global financial crisis — then Silicon Valley Bank collapsed, dashing hopes of a new dawn for banking in Japan.

Losses in Silicon Valley Bank’s bond portfolio have highlighted similar risks for Japanese lenders’ gigantic foreign bond holdings, which are carrying over 4 trillion yen (USD 30 billion) in unrealized losses.

At the same time, a radical shift in the global interest rate outlook has dashed bets on policy normalization – and more lucrative lending – any time soon in Japan.

Three days of selling has the Tokyo Stock Exchange banks index down 16% – its sharpest drop since the days after the 2011 earthquake and tsunami struck Japan. The index led falls in Asia on Tuesday while other markets steadied.

“Japanese banks share with SVB the characteristic of having substantial holdings of bonds, whose prices fall when bond yields rise, creating solvency risk,” said Michael Makdad, a senior equity analyst at Morningstar in Tokyo.

Most, he said, have hedged their exposure and stand prepared to manage losses. Japan’s banks have also said as much.

But sharp falls in the shares of Japan Post Bank 7182.T, which Makdad calculated as the most exposed, and some slight wobbles in bond prices for the unlisted Norinchukin – also with heavy exposure – illustrate concern and Japan’s vulnerability.

Japan’s bond holdings are also huge. Japanese investors are the largest foreign owners of US Treasuries, with financial firms chief among big holders since low domestic loan rates and low yields drive them to find better, but safe, returns elsewhere.

“The difference comes from the loan-to-deposit ratio,” said Norihiro Yamaguchi, senior economist at Oxford Economics.

“In Japan, it’s quite low compared to other banks in the Asian region, so it means that they rely heavily on bond investments,” he said. “With the chronic low interest rate environment in Japan, they actively invest in US Treasuries.”

BONDS GETTING HIT

Most of the time, bond losses aren’t a problem for banks, which typically hold their investments to maturity.

But after the worst year in global bond markets for decades, the losses are very big — foreign bond losses totaled about 3 trillion at the end of December at Japan’s top three banks, and analysts at SMBC Nikko calculated another 1.4 trillion yen in unrealized foreign bond losses for regional banks.

Most analysts agree these risks are in hand. An annual Bank of Japan report published on Tuesday said Japanese financial institutions have sufficient capital buffers.

But it also said portfolio losses have swelled at regional banks, and that is where selling pressure has been heaviest as investors fret that smaller lenders will find it harder to navigate market volatility.

Share prices for such lenders had rallied hardest through the autumn as speculation mounted that a shift out of ultra-easy policy settings in Japan was in the offing and the prospect of higher interest rates and better margins lay ahead.

Japan’s top regional bank, Resona Holdings 8308.T, was the biggest loser on the Nikkei on Tuesday, dropping 9.2%, and is now falling harder than peers with a 21% loss in three days.

Japan’s biggest financial firm, Mitsubishi UFJ Financial Group 8306.T fell 8.6% on Tuesday and has lost more than 2 trillion yen in market value with a 17% drop in three sessions.

“I think it’s about bonds getting hit,” said Joshua Crabb, head of Asia-Pacific equities at Robeco. “And maybe some concerns Japanese banks have exposures, and some profit taking,” he said. The banking index rose 40% from September to February.

(USD 1 = 134.0900 yen)

(Reporting by Summer Zhen in Hong Kong, Rae Wee and Vidya Ranganathan in Singapore and Makiko Yamazaki in Tokyo; Writing by Tom Westbrook; Editing by Simon Cameron-Moore)

Oil falls to three-month low on inflation worries, US bank shutdowns

NEW YORK, March 14 (Reuters) – Oil prices dropped over 4% to a three-month low on Tuesday after a US inflation report and the recent US bank failures sparked fears of a fresh financial crisis that could reduce future oil demand.

Brent futures fell USD 3.32, or 4.1%, to settle at USD 77.45 a barrel, while US West Texas Intermediate (WTI) crude fell USD 3.47, or 4.6%, to settle at USD 71.33.

They were the lowest closes for both benchmarks since Dec. 9 and their biggest one-day percentage declines since early January. In addition, both contracts fell into technically oversold territory for the first time in weeks.

Shockwaves from Silicon Valley Bank’s collapse triggered big moves in bank shares as investors fretted over the financial health of some lenders, in spite of assurances from US President Joe Biden and other global policymakers.

“The market is either anticipating a recession in the future or it could be that one or more funds had to raise cash and reduce the risk on their books because they are concerned about liquidity after the bank failures,” said Phil Flynn, an analyst at Price Futures Group. He has not heard of any fund in trouble.

US consumer prices increased solidly in February as Americans faced persistently higher costs for rents and food, posing a dilemma for the US Federal Reserve whose fight against inflation has been complicated by the collapse of two regional banks.

“Crude prices are falling after a mostly in-line inflation report sealed the deal for at least one more Fed rate hike,” said Edward Moya, senior market analyst at data and analytics firm OANDA.

Data showed the US Consumer Price Index (CPI) rose 0.4% in February from 0.5% in January. That slight slowdown in consumer price growth prompted investors to price in a smaller rate hike by the Fed in March.

The Fed is now seen raising its benchmark rate by just a quarter of a percentage point next week, down from a previously expected 50-basis points, and delivering another hike of the same size in May. The Fed’s next two-day meeting starts next Tuesday.

“The Fed’s tightening work is not done just yet and the chances are growing that they will send the economy into a mild recession, and risks remain that it could be a severe one,” OANDA’s Moya said.

The US central bank uses higher interest rates to curb inflation. But those higher rates increase consumer borrowing costs, which can slow the economy and reduce demand for oil.

Tuesday’s crude price decline also came ahead of US data expected to show energy firms added about 1.2 million barrels of oil to crude stockpiles during the week ended March 10.

The American Petroleum Institute (API), an industry group, will publish its inventory data at 4:30 p.m. EDT on Tuesday and the US Energy Information Administration at 10:30 a.m. on Wednesday.

Limiting crude’s price decline – at least earlier in the day – was a monthly report from the Organization of the Petroleum Exporting Countries (OPEC) projecting higher oil demand in China, the world’s biggest oil importer, in 2023.

Chinese consumers, unshackled from COVID-19 restrictions, are returning to hotels, restaurants, and some shops, but they are choosy about what they buy, disappointing hopes for an immediate post-pandemic splurge.

OPEC, however, left unchanged its forecast for world oil demand to increase by 2.32 million barrels per day, or 2.3%, in 2023.

The International Energy Agency (IEA) will publish its monthly report on Wednesday.

(Additional reporting by Emily Chow in Singapore; Editing by Mark Potter, Sharon Singleton and Emelia Sithole-Matarise)

Gold bulls hope short-term bank contagion sparks longer-term rally: Russell

LAUNCESTON, Australia, March 14 (Reuters) – The gold bulls are running again, hoping that a short-term boost from the collapse of Silicon Valley Bank can be translated into a longer-term rally for the precious metal.

The spot price of gold rallied strongly on Monday after US regulators enacted a series of emergency measures after the failure of Silicon Valley Bank (SIVB) and Signature Bank (SBNY) in New York.

Gold ended at USD 1,913.24 an ounce on Monday, having gained 4.5% since its close on March 9, and closing in on the high so far in 2023 of USD 1,959.60 on Feb. 2.

The rally was driven by investors buying into gold Exchange Traded Funds (ETFs), with the largest such vehicle, the SPDR Gold Trust reporting that its holdings rose 1.31% on Monday to 913.27 tons from 901.42 tons on March 10.

This is equivalent to 29.03 million ounces, but it’s worth noting that the SPDR holdings have been in a declining trend since April last year, when they peaked at 35.58 million ounces.

The broader question for the gold market is whether worries of a wider contagion in US financial markets will persist, or whether the actions of the Federal Reserve and the move by President Joe Biden to assuage fears will prevent the spread.

Even if the market is reassured that the problem is limited to the two collapsed banks, there may be implications that are positive for the price of gold.

Any suggestion that the Federal Reserve will pare back its current tightening of monetary policy is likely to be a longer-term positive for gold, especially if this occurs before the market is confident that high inflation is tamed.

So far it appears that gold is once again fulfilling its traditional role as a safe haven against volatility and risk, but it’s probably too early to say that the current buying will persist.

Nonetheless, the likely ramifications of the bank collapse are positive for gold, which was already being supported by other bullish factors.

CHINA, INDIA DEMAND

Chief among those is the expectation that physical demand will rebound in China, traditionally the world’s largest consumer of the precious metal.

China’s economy is recovering from the now abandoned strict zero-COVID policies that crimped growth last year, and there is likely some pent-up demand for gold jewelry, bars and coins that provides upside for demand.

China’s gold jewelry demand slumped 14%, or 101 tons, to 598.3 tons in 2022, according to data from industry group the World Gold Council.

This meant China’s jewelry demand dropped below that of India, which saw demand of 600.4 tons in 2022, a decline of 2% from the prior year.

This was the first time since 2011 that India’s jewelry demand exceeded that of China, indicating that there is plenty of upside should the expectations for a rebound in China’s economy come to fruition.

The outlook for India is also fairly upbeat as the country’s economy continues to perform strongly, with gross domestic product expected to rise 7% in the current 2022-23 fiscal year that ends on March 31.

China and India play an outsize role in the physical gold jewelry market, accounting for about two-thirds of the global total in 2022, with the next biggest country being the United States, which had jewelry demand of 143.7 tons last year.

Central bank buying is the wildcard for gold, having risen a strong 152% in 2022 to 1,135.7 tons.

Whether this trend continues is hard to predict, given that some of the biggest players in this space, such as China and Russia, provide little to zero public commentary on their intentions.

Overall, the risks for gold are skewed to the upside assuming that investors are drawn back to gold as a hedge against risk and inflation, China and India boost their physical demand, and central bank buying also holds up.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Sonali Paul)

European stocks log strongest one-day gain this year after three-day rout

March 14 (Reuters) – European shares on Tuesday posted their biggest single-day gain in nearly three months, helped by a resilient outlook for the region’s banking sector in the face of Silicon Valley Bank’s (SVB) collapse and growing optimism over a slowdown in the Federal Reserve’s rate-hiking cycle.

The pan-European STOXX 600 index closed 1.5% higher amid a broad-based rally, rebounding from its worst three-day selloff of 3.9% this year.

European banks rebounded 2.5% after recording their worst single-day sell-off in over a year on Monday, as US regulators’ moves to guarantee SVB’s deposits failed to reassure investors.

The index also notched its worst two-day selloff of 9.4% on Monday since the Russia-Ukraine war broke out early last year.

“The selloff (in banks) was well and truly overdone,” said Gerry Fowler, head of European equity strategy at UBS.

“The market realizes that there may well have been a path of sentiment contagion, but the resilience of the European banking sector is greater than people thought and the squeezing out of positions is perhaps reversing somewhat today.”

Further, Chancellor Olaf Scholz believes that Germans should not have major concerns about the SVB fallout and that regulators had learned lessons from the global financial crisis in 2008.

On the data front, US consumer prices rose in line with expectations and bolstered bets of a smaller rate hike by the Fed next week, boosting Wall Street’s main indexes on Tuesday.

Investors are also keenly awaiting the European Central Bank’s interest rate hike decision on Thursday, which is expected to be a 50-basis point.

Meanwhile, Deutsche Bank sees a higher likelihood of the ECB raising its key rate by 25 basis points, in light of the SVB collapse.

Industrial goods spearheaded the gains among European sector indexes, boosted by a 7% jump in Rolls-Royce (RR) and 3.3% rise in Britain’s biggest defense company BAE Systems (BAES) on plans to build the vessels for nuclear-powered attack submarines for Australia.

German arms maker Rheinmetall (RHMG), Italy’s Leonardo (LDOF), France’s Thales (TCFP) and Sweden’s SAAB (SAABb) also advanced between 3% and 4.6%.

Among others, Casino (CASP) soared 7.3% after the French supermarket retailer launched a sale of shares in Brazilian supermarket chain Assai (ASAI3) to cut debt.

Italy’s Assicurazioni Generali (GASI) gained 3.6% after the insurer surprised investors by hiking its dividend payout.

Meanwhile, Close Brothers (CBRO) dropped 6% to the bottom of the STOXX 600 as higher Novitas provision weighed on its profit.

Credit Suisse (CSGN) slipped 0.8% after the embattled Swiss lender said customer “outflows stabilized to much lower levels but had not yet reversed” in its 2022 annual report.

(Reporting by Sruthi Shankar and Ankika Biswas in Bengaluru; Editing by Subhranshu Sahu)

Philippines posts biggest trade deficit in 5 months

MANILA, March 14 (Reuters) – The Philippines posted its widest trade deficit in five months for January as exports fell sharply, pointing to a worsening trade balance that could put pressure on the peso in the near term.

The trade gap in January ballooned to USD 5.74 billion, the biggest since the record monthly deficit of $6 billion in August, preliminary government data showed on Tuesday.

Exports saw the steepest decline in nearly three years, down 13.5% to USD 5.2 billion from a year earlier, while imports grew 3.9% to USD 11 billion from the same period in 2022.

It was the first monthly rise for imports in three months.

The January trade gap was worse than the deficit of around USD 4.3 billion that ING had projected.

“The persistent trade deficit in the Philippines points to depreciation pressure for…the Philippine peso in the near term,” ING senior economist Nicholas Mapa said.

The peso has fallen more than 2% since hitting 53.65 per US dollar on Feb. 3, which was the strongest close so far this year. It was at 55.03, as of 0216 GMT.

(Reporting by Neil Jerome Morales and Enrico Dela Cruz; Editing by Martin Petty)

Sliding bank shares drag Wall Street down in choppy trade

NEW YORK, March 13 (Reuters) – Sliding bank shares dragged Wall Street down on Monday with investors worried about contagion from the Silicon Valley Bank collapse, but trade was choppy, and the Nasdaq composite ended higher as some sectors benefited from hopes the Federal Reserve could ease up on interest rates hikes.

SVB Financial’s (SIVB) sudden shutdown on Friday after a failed capital raise had investors worried about risks to other banks from the Fed’s sharp rate hikes over the last year. But many speculated the central bank could now become less hawkish, and the yield on the 2-year Treasury tumbled.

Regulators over the weekend stepped in to restore investor confidence in the banking system, saying SVB’s depositors will have access to their funds on Monday.

To some investors, the Fed’s decision next week will also hinge on inflation data due this week.

“If we get shockingly bad Consumer Price Index and Producer Price Index, the Fed is going to find itself in a tough spot or a much tougher spot that it even finds itself in ahead of those prints,” said Orion Advisor Solutions CIO Timothy Holland.

The Dow Jones Industrial Average fell 90.5 points, or 0.28%, to 31,819.14, the S&P 500 lost 5.83 points, or 0.15%, to 3,855.76 and the Nasdaq Composite added 49.96 points, or 0.45%, to 11,188.84.

The CPI data is due on Tuesday and PPI on Wednesday.

The defensive utilities rose 1.54% as one the best performing of the 11 major S&P sectors while interest rate sensitive groups such as real estate and technology also climbed.

“The market is now expecting that the Fed is likely to not raise rates this month and so they may enter a pause period,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

Shares of SVB’s peer Signature Bank (SBNY), which was also shut down by regulators, were halted. Nasdaq said they would remain so until the exchange’s request for additional information was “fully satisfied.”

President Joe Biden vowed to do whatever was needed to address the threat to the banking system.

First Republic Bank (FRC) dropped 61.83% as news of fresh financing failed to reassure investors, while Western Alliance Bancorp (WAL) and PacWest Bancorp (PACW) fell 47.06% and 21.05%, respectively. Trading in the stocks was halted several times.

Weighing on the S&P 500, Charles Schwab (SCHW) tumbled 11.56% upon resuming trade after the financial services company reported a 28% decline in average margin balances and a 4% fall in total client assets for February.

Shares of big US banks, including JPMorgan Chase & Co (JPM), Citigroup (C), and Wells Fargo (WFC) all lost ground. The S&P Banking Index fell 7%, its largest one-day percentage drop since June 11, 2020.

The CBOE Volatility Index, known as Wall Street’s fear gauge, rose 1.72 points to 26.52 after earlier hitting 30.81, its highest since late October.

Traders are now largely pricing in a 25-basis point rate hike from the Fed in March, with bets that the central bank will hold interest rates at their current level standing at 44.4%.

Among individual stocks, Pfizer Inc (PFE) was up 1.19% after the drugmaker said it would buy Seagen Inc (SGEN) for nearly USD 43 billion.

Declining issues outnumbered advancing ones on the NYSE by a 2.31-to-1 ratio; on Nasdaq, a 1.63-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 48 new lows; the Nasdaq Composite recorded 29 new highs and 526 new lows.

(Reporting by David Carnevali; Editing by David Gregorio)

Markets now banking on no more Fed hikes

March 14 (Reuters) – After the crash, bang, and wallop of two US banks collapsing and regulators steaming in with emergency measures late on Sunday to prevent contagion from sweeping through markets, the sound you hear now is the screech of economists and investors reversing on their Fed forecasts.

If the ratcheting up of US rate expectations in the last few months was almost without precedent, the complete turnaround in the last few days is truly historic.

A week ago, Barclays economists raised their forecast for the Fed’s March 21-22 meeting to a 50-basis point rate hike from 25 bps. On Monday, they changed that to zero.

Rates futures markets show traders now reckon the Fed is done raising rates and will cut by 50 bps later this year. The implied ‘terminal’ rate has plunged more than 100 bps since last week to 4.35%, and the year-end implied rate has plummeted more than 150 bps to 3.90%.

The two-year Treasury yield’s slide of around 65 bps since Thursday marks the biggest three-day fall since the Black Monday crash in 1987.

So how will Asian markets open on Tuesday? Equity investors are essentially being pulled in the opposite direction by two competing, and powerful forces.

On one hand, huge stress in the US banking system, the collapse of the country’s 16th largest bank and emergency intervention from the Fed, Treasury and FDIC to prevent contagion is a screaming sell signal. US banking stocks tanked 7%, their biggest fall in almost three years.

On the other, swift and bold intervention, the most stunning collapse in bond yields and implied interest rates, a sharply weaker dollar, and expectations that the Fed’s tightening campaign is over has clearly tempted a lot of buyers.

World stocks fell on Monday and are now down five days in a row, the longest losing streak since October. But Wall Street was mixed – the Dow and S&P 500 ended down 0.3% and 0.15%, respectively, while the Nasdaq rose 0.45%.

Hong Kong tech stocks broke a five-day losing streak to jump 3% on Monday, and the Nasdaq’s resilience may provide a springboard for further upside on Tuesday. The weaker dollar and sharply lower US yields could also lead to broader support.

But the dust has almost certainly not settled yet, especially if US inflation figures on Tuesday come in hotter than expected.

Here are three key developments that could provide more direction to markets on Tuesday:

– US CPI inflation (February)

– India wholesale inflation (February)

– South Korea central bank minutes

(By Jamie McGeever; editing by Aurora Ellis)

As hawkish Fed pricing goes away, bullish dollar calls fade

March 13 (Reuters) – The collapse of two big US regional banks has forced the US bond markets into a near 180-degree turn from pricing in a more aggressive Federal Reserve and is eroding expectations the greenback could resume a new rally to fresh 20-year highs.

Emergency measures by the Fed and the US government on Sunday to guarantee bank deposits have failed to reassure markets after Silicon Valley Bank (SIVB) and Signature Bank (SBNY) collapsed.

Since Thursday, the tumble in short-term US Treasury yields, which were at 15-year highs, was the steepest since October 1987, and pulled the dollar down from three-month highs.

Two-year yields fell as low as 3.939% on Monday, down more than a percentage point from a 15-year high of 5.084% reached last week, while 10-year yields dipped to 3.418%, from more than 4% last week.

The moves come as investors rush for safe havens and adjust for a less aggressive Fed in the wake of the bank failures. The dollar dipped 0.60% against a basket of currencies on Monday.

“The market is basically saying that the Fed is done here,” said Mazen Issa, senior FX strategist at TD Securities in New York. “It wouldn’t surprise me if the market now will just try to continuously fade the Fed and won’t believe any kind of realm of hawkishness that emerges, and it’s not clear whether or not the Fed will continue to be hawkish.”

Fed Chairman Jerome Powell surprised markets last week when he said that the US central bank might reaccelerate the pace of rate hikes as it battles still-high inflation and benefits from a still strong employment picture. That sent Treasury yields sharply higher and boosted the dollar index.

But that prospect now appears off the table.

Fed funds futures traders now see the Fed as most likely to leave rates unchanged when it meets on March 21-22, or raise rates by 25 basis points, a dramatic change from last week after Powell’s comments before congressional committees, when a 50-basis points rate increase was viewed as the most likely outcome.

Some banks, including Goldman Sachs and NatWest Markets, have also said they no longer expect the Fed to raise rates this month.

Traders are also pricing for the Fed to cut rates this year, with the fed funds rate expected to fall to 3.80% in December, from 4.57% now. As of last week, traders had largely given up on the prospect of rate cuts this year.

“There are potentially heightened recession risks,” on the back of the financial stability issues, said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

While the market may retrace some of Monday’s sharp moves, “there are these kind of prevailing questions around the future provision of credit, of bank lending, that have to be answered before markets are going to price as aggressive of a hiking cycle as they previously were,” Cohn said.

Fed officials are in a blackout period before the March meeting, which leaves a dearth of guidance on the extent to which the financial stability risks may alter their view on further tightening.

Even if they repeat their commitment to bringing down inflation, investors may be unlikely to embrace the message to the extent they did only last week.

“If the market’s assumption as recently as a week ago was the Fed can and will continue to hike no matter what, that’s no longer, I think, the view, (and) it’s going to be very difficult for the market to come back to that view,” said Brian Daingerfield, head of F10 FX strategy at NatWest Markets in Stamford, Connecticut.

“From a dollar perspective, that’s very important because the resetting of Fed expectations ever higher was a big part of the dollar rally we had seen before these moves,” he added.

(Reporting by Karen Brettell; Editing by Alden Bentley and Jonathan Oatis)

As banks break, markets hear the sound of peaking rates

SINGAPORE, March 13 (Reuters) – Investors scrambled to pull down global rate expectations on Monday and abandoned wagers on steep US hikes next week, reckoning the biggest American bank failure since the financial crisis will make policymakers think twice.

On Sunday, the US administration took emergency steps to shore up banking confidence, guaranteeing deposits after withdrawals overwhelmed Silicon Valley Bank and closing under-pressure lender Signature Bank in New York.

But while stock futures rose in relief, bond markets opened in Asia with a furious race to re-price rate expectations on the thinking that the Federal Reserve can only be reluctant to hike next week while the mood is febrile and delicate.

US interest rate futures surged and a hard-running rally in short-term bonds extended, putting two-year Treasuries on course for their best three-day gain since Black Monday in 1987.

Bank stress and the resultant shakeout of loan books mean higher borrowing costs, said Akira Takei, fixed income portfolio manager at Asset Management One in Tokyo, with the resulting pressure in the real economy making further hikes difficult.

“If (US Fed Chair Jerome) Powell lifts interest rates next week, he will jeopardize this situation,” he added. “If they don’t prioritise financial stability, it’s going to (breed) financial instability and recession.”

A late-Sunday note from Goldman Sachs, in which the banks’ analysts said the banking stress meant they no longer forecast the Fed to hike rates next week gave the rates rally an extra leg in the Asia session.

Two-year yields were last down nearly 20 basis points and have fallen almost 70 bps since Wednesday.

At 4.4098% they are also below the bottom end of the Fed funds rate window at 4.5% – a sign markets see rates’ peak is near. The latest futures pricing implies a near 20% chance the Fed stands pat next week and an 80% chance of a 25 bp hike – a huge shift from last week when markets braced for a 50 bp hike.

“I think people are linking Silicon Valley Bank’s problems with the rate hikes we’ve already had,” said ING economist Rob Carnell.

“If rates going up caused this, the Fed is going to mindful of that in futures,” he said. “It’s not going to want to go clattering in with another 50 (bp hike) and see some other financial institution getting hosed.”

Terminal slide

Monday’s early moves also sharply pulled forward and pushed down market expectations for where rates peak. From about 5.7% on Wednesday, implied pricing for the peak in US rates was testing 5% on Monday and year-end expectations–above 5.5% last week–tumbled to about 4.7%, a drop of some 80bps in days.

There were also rallies in Australian interest-rate futures and Europe futures, which rarely move much in Asia, with traders reckoning global policymakers turn cautious.

The size of the shifts drew warnings from analysts who said they could unwind quickly especially if US inflation data is hot next week. Long-dated bonds were also left behind, with inflation being a greater risk if hikes were to slow or stop.

“The market, particularly in the Asia timezone is still digesting the news about the fall of the SVB,” said Jack Chambers, senior rates strategist at ANZ Bank in Sydney.

“If anything, support for deposit holders supports the idea that the Fed could keep tightening policy,” he said, if the measures were able to ring-fence problems to a few banks.

Still, a new Fed bank funding scheme aimed at addressing some of Silicon Valley Bank’s apparent problems with losses in its bond portfolio is expected to further help with stability for banks and bonds.

Banks will now be able to borrow at the Fed against collateral such as Treasuries at par, rather than market value – greatly reducing any need for banks to liquidate bonds to meet unexpected withdrawals.

(Reporting by Tom Westbrook. Editing by Sam Holmes)

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