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)

Japan’s Nikkei drops as SVB collapse weighs on bank stocks; autos slump

TOKYO, March 13 (Reuters) – Japan’s Nikkei share average fell more than 1% on Monday, with banks leading losses as investors fretted over the potential fallout of Silicon Valley Bank’s (SVB) collapse last week.

Automakers also slumped amid pressure from a stronger yen, with Mitsubishi Motors pacing declines.

The Nikkei sank 1.11% to 27,832.96 as of the close, though that was well off the day’s low of 27,631.53, the weakest level since March 2.

The broader Topix dropped 1.5% to 2,000.99, after earlier touching 1,987.00 for the first time since March 1.

Banking was the worst performing sector among the 33 industry groups, dropping 4.01%. It was followed by insurance and securities, which fell 3.66% and 2.82% respectively.

Japan’s top government spokesman tried to allay fears over SVB’s fallout, saying he didn’t see it affecting Japan’s lenders.

Transport equipment makers slid 2.34% as the yen pushed to a one-month high versus the dollar.

The domestic slump followed mayhem on Wall Street on Friday, as banking shares tumbled after SVB became the biggest bank failure since the financial crisis.

However, the US Treasury and Federal Reserve announced a range of measures to support the banking system at the weekend, leading US futures to point firmly higher on Monday.

“Stocks will probably rebound to previous levels by Tuesday,” said Nomura equity strategist Kazuo Kamitani, adding that investors will be keeping a close eye on the 25-day moving average at 27,713.

While the outlook for Fed policy has been clouded by SVB’s collapse, Kamitani said that US economic data should remain the primary focus, and “ultimately, what investors need to pay attention to is CPI,” due on Tuesday.

Condordia Financial Group was the worst-performing lender on the Nikkei, down 5.29%. Mizuho slid 4.94%.

Mitsubishi Motors led all Nikkei decliners with a 6.46% plunge, closely followed by Mazda’s 5.96% loss. Nissan slumped 4.95%.

(Reporting by Kevin Buckland; Editing by Rashmi Aich)

Australia shares end lower as financials, tech drag after US bank collapse

March 13 (Reuters) – Australian shares extended losses on Monday, led by financials and tech stocks, as investor focussed on the developments around the collapse of US-based Silicon Valley Bank (SVB).

The S&P/ASX 200 index finished 0.5% lower at 7,108.80, easing off from a more than two-month low hit during the session. The benchmark had shed more than 2% on Friday.

In the global markets, sentiment recovered after US regulators reassured markets that they would protect customer deposits to prevent contagion from the failure of tech startup-focused SVB.

Australian banking stocks slid 1.4% after earlier hitting a five-month low, with the “Big Four” lenders losing between 0.4% and 1.9%.

The country’s prudential regulator said it was seeking more information from Australian banks regarding any impact from the collapse.

SVB’s collapse sparked a global flight to safety, sending gold prices surging and driving a 4% jump in the Australian gold index and limiting losses on the broader index.

Gold producers Regis Resources, Ramelius Resources and Northern Star Resources were the top performers on the benchmark.

Miners closed 1.2% higher on strong iron ore prices, with a 1.5% gain in mining giant BHP group.

Tech stocks fell 1.3%, in line with US peers on Friday amid risks from the SVB’s failure. Several antipodean tech firms have said they did not have material exposure to SVB.

Australian interest rate expectations will be anchored to the domestic economic indicators during the week, Steven Daghlian, an analyst with Commonwealth Bank of Australia said.

“Looking ahead and sentiment in markets and the subsequent price action will most likely be affected by the US CPI print. This is key now the marquee known event risk that could really move markets around,” said Chris Weston, head of research at Pepperstone brokerage.

New Zealand’s benchmark S&P/NZX 50 index closed 0.5% down at 11,672.90.

(Reporting by Savyata Mishra in Bengaluru; Editing by Rashmi Aich)

Gold jumps 1% as investors seek cover after SVB collapse

March 13 (Reuters) – Gold prices jumped more than 1% on Monday as fears of a fallout from the largest US bank failure since the 2008 financial crisis drove investors to the safe-haven asset.

Spot gold was up 0.6% at USD 1,878.54 per ounce, as of 0631 GMT. Earlier in the session, bullion hit its highest since February 3 at USD 1,893.96.

US gold futures gained 0.9% to USD 1,884.30.

“Gold has certainly sprung back to life, with safe-haven flows sending prices to within a cat’s whisker of USD 1,900,” said Matt Simpson, a senior market analyst at City Index.

Gold rallied 2% on Friday after California regulators closed tech startup-focused Silicon Valley Bank (SVB). Regulators also shuttered New York-based Signature Bank on Sunday.

Helping gold’s advance was a sharp retreat in the dollar.

“Fears of market contagion and stresses may prompt Federal Reserve officials to reconsider the pace of hikes at the upcoming FOMC (Federal Open Market Committee) meeting as preserving financial stability takes precedence,” said OCBC FX strategist Christopher Wong.

Considered a hedge against economic uncertainties, zero-yield gold also becomes a more attractive bet in a low interest rate environment.

Traders have priced out a 50 basis-point hike in March, in contrast to a 70% chance before the SVB collapse. Rate cuts have also now been priced in by end-2023.

Goldman Sachs said on Sunday it no longer expected the Fed to deliver a hike on March 22. Goldman had previously expected a 25 basis-point hike in March.

The revised rate expectations, combined with measures by US officials to battle the financial fallout from SVB’s collapse, boosted riskier assets, but gold has so far held onto most of its gains.

“When it becomes apparent that the risk is contained, gold will be less appealing as a safe-haven,” City Index’s Simpson said.

Silver added 1.2% at USD 20.76 per ounce, platinum was 0.7% higher at USD 965.61 and palladium climbed 2.4% to USD 1,412.51.

(Reporting by Kavya Guduru in Bengaluru; Editing by Subhranshu Sahu and Sherry Jacob-Phillips)

Stock futures, bonds rally as US acts to stabilize banks

SYDNEY, March 13 (Reuters) – US stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), though investors were also still favoring the safety of sovereign debt.

In a joint statement, the US Treasury and Federal Reserve announced a range of measures to stabilize the banking system and said depositors at SVB (SIVB) would have access to their deposits on Monday.

The Fed said it would make additional funding available through a new Bank Term Funding Program, which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

The moves came as authorities took possession of New York-based Signature Bank (SBNY), the second bank failure in a matter of days.

Analysts noted that, importantly, the Fed would accept collateral at par rather than marking 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, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” he added. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”

Investors reacted by sending US S&P 500 stock futures up 0.9%, while Nasdaq futures rose 1.1%.

Yet, such was the concern about financial stability, that investors speculated the Fed would now be reluctant to rock the boat by hiking interest rates by a super-sized 50 basis points this month.

Fed fund futures surged in early trading to imply only a 28% chance of a half-point hike, compared to around 70% before the SVB news broke last week.

The peak for rates came all the way back to 5.11%, from 5.69%, last Wednesday, and markets were even pricing in rate cuts by the end of the year.

That, combined with the shift to safety, saw yields on two-year Treasuries dive 47 basis points on Thursday and Friday to stand at 4.58%, a long way from last week’s 5.08% peak.

Treasury 10-year bond futures added another 6 ticks on Monday, having been up over 20 ticks at one stage in hectic early trade.

“Accelerating your pace of hikes in the face of a significant bank failure may not be the wisest play for the Fed, especially if subsequent problems emerge stemming from similar root causes – underwater rates portfolios,” said John Briggs, global head of economics at NatWest Markets.

Still, much will depend on what US consumer price figures reveal on Tuesday, with an obvious risk that a high reading will pile 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 lift its rates by 50 basis points and to flag more tightening ahead, though it will now have to take financial stability into account.

In currency markets, the dollar dipped 0.6% on the safe-haven Japanese yen to 134.20 JPY=EBS, while easing 0.6% on the Swiss franc. The euro firmed 0.5% to USD 1.0698 as US yields dropped.

Gold climbed 0.8% to USD 1,882 an ounce, having jumped 2% on Friday.

Oil prices edged higher, with Brent up 10 cents at USD 82.88 a barrel, while US crude rose 26 cents to USD 76.94 per barrel.

(Reporting by Wayne Cole; editing by Diane Craft and Sam Holmes)

Australian shares log worst day in 4 months on rout in banks, miners

March 10 (Reuters) – Australian shares posted their sharpest daily loss in over four months on Friday, weighed down by financials and miners in a sell-off over prospects of further interest rate hikes.

The S&P/ASX 200 index fell 2.3% to 7,144.7 points. The benchmark lost about 2% over the week.

Investor sentiment remained subdued during the week after US Federal Reserve Chair Jerome Powell’s hawkish remarks, highlighting the need of a high interest rate environment to tame inflation.

Investors now await US non-farm payrolls data for February, due later in the day, which is expected to fuel inflationary woes.

Back in Sydney, banks led the losses with the sub-index closing 2.8% lower.

The Australian Securities and Investments Commission (ASIC) said that country’s six largest banking service providers have paid or offered AUD 4.7 billion (USD 3.09 billion) in compensation to customers charged with higher fees.

All of the “Big Four” lenders fell, with ANZ Group Holdings Ltd down 2.8%. Financial conglomerate Macquarie Group Ltd and asset manager AMP Ltd also fell.

“The bank sell-off is clearly driving the rest of the market lower as lenders face their own set of challenges, which include a slowing property market and greater competition for few loans as the economy slows,” said Carl Capolingua, Market Analyst at ThinkMarkets Australia.

Local lithium miners emerged as one of the top laggards on the benchmark, with seven of top ten losers on ASX-200 being lithium producers.

Shares tanked as spodumene prices hit one-year low. Heavyweights Mineral Resources Ltd and Pilbara Minerals Ltd lost 6.6% and 7.1% respectively.

Energy shares and miners tracked the broader market despite higher or unchanged underlying commodity prices. The sub-indexes closed down around 3.3% each.

Mining stocks BHP Group Ltd, Rio Tinto Ltd, Fortescue Metals Group Ltd, and oil and energy majors Woodside Energy Group Ltd and Santos Ltd all traded in the red.

New Zealand’s benchmark S&P/NZX 50 index fell 0.8% to end the day at 11,727 points.

(Reporting by Rishav Chatterjee in Bengaluru; Editing by Varun H K)

UK Stocks-Factors to watch on March 10

March 10 (Reuters) – Britain’s FTSE 100 .FTSE index is seen opening lower on Friday, with futures FFIc1 down 1.4%.

* SHELL: Brazilian state-run company Petrobras PETR4.SA and international oil major Shell SHEL.L will work together to identify potential opportunities to explore for and produce crude and natural gas, Petrobras said.

* ASDA: British supermarket groups Asda and Morrisons have started to remove some of their customer purchase limits on salad vegetables and fruit after weeks of shortages and empty shelves.

* LENDERS: Britain’s financial watchdog said it expects the number of mortgage borrowers struggling to keep up with payments to rise at a much slower pace in the next 12 months than previously forecast because interest rate hikes will be more modest.

* OIL: Oil fell for a fourth session, heading for its biggest weekly loss in five weeks on worries about the prospect of steep interest rate hikes in the United States slowing growth and hitting fuel demand.

* GOLD: Gold prices eased as investors keenly look forward to the U.S. non-farm payrolls report due later in the day to assess the likely path of the Federal Reserve’s rate-tightening cycle.

* METALS: Copper prices slid, heading for weekly losses as fears over persistent interest rate hikes by the U.S. Federal Reserve weighed on investor sentiment, while improving supply prospects added downward pressure on the market.

* FTSE: London’s FTSE 100 closed lower on Thursday amid investor caution over higher U.S. interest rates, with mining stocks leading the falls as metal prices dropped due to a stronger dollar.

* UK CORPORATE DIARY:

Berkeley Group	BKGH.L	Trading update
Robert Walters Plc	RWA.L	FY Results

* For more on the factors affecting European stocks, please click on: LIVE/

TODAY’S UK PAPERS
> Financial Times PRESS/FT
> Other business headlines PRESS/GB

(Reporting by Prerna Bedi in Bengaluru)

((Prerna.Bedi@thomsonreuters.com; +91 98052 24616;))

Oil market has fully absorbed impact of Russia’s invasion of Ukraine: Kemp

LONDON, March 9 (Reuters) – What a difference a year makes.

In the past twelve months, the oil market has absorbed the impact of Russia’s invasion of Ukraine and the sanctions imposed in response by the United States, the European Union and their allies in Asia.

Russia’s crude and fuel exports have been redirected to South and East Asia, while former markets in Europe have been backfilled with crude and products from the Middle East and Asia.

The United States and EU have imposed broad sanctions on Russia’s exports, including ancillary financial and shipping services, but softened them with significant exceptions and a relaxed approach to enforcement.

And a global slowdown in manufacturing and freight activity has trimmed consumption of diesel and other middle distillates, easing the introduction of sanctions while avoiding any physical shortages.

As a result, benchmark oil prices have retreated by nearly 40% from their post-invasion high on March 8, 2022, after adjusting them for core inflation.

Following the initial shock, crude prices have traded in a tight range since late November, with spot prices, calendar spreads and volatility all converging towards long-term averages:

Brent’s front-month futures contract finished trading below USD 83 per barrel on March 8, 2023, in the 43rd percentile for all months since the turn of the century, after adjusting for inflation.
Front-month prices have settled back from an inflation-adjusted post-invasion high of USD 134 a year ago (76th percentile), when traders were concerned about a possible cessation of Russian exports.
Brent’s six-month calendar spread closed in a backwardation of USD 2.50 per barrel on March 8 (75th percentile), reflecting the low level of inventories, but still down from a record high of USD 22 a year ago.
Realised price volatility in the front-month contract has fallen to an annualised rate of less than 25% (34th percentile) down from a peak of 88% (98th percentile) a month after the invasion.
In the physical market, dated Brent’s five-week spread is in a backwardation of just 9 cents (50th percentile), down from USD 7 (99th percentile) a year ago.

Chartbook: Brent prices, spreads and volatility

Traders have found a temporary equilibrium, with prices bounded above by fears about a business cycle slowdown and rising interest rates, and below by expectations for a rebound in China and the low level of inventories.

Reflecting that balance, fund managers held a fairly average combined position across the six major futures and options contracts of 576 million barrels (47th percentile) on February 14, the most recent data available.

Like all equilibria in the oil market, this one is likely to prove temporary and fragile – lasting until one or more of the risks around recession, inflation and China’s post-pandemic rebound materialise or fade away.

Global petroleum inventories remain well below the prior ten-year seasonal average and there is little (unsanctioned) spare capacity in either the crude production or refining systems.

If the global economy and petroleum consumption growth accelerate again, inventories and spare capacity will become critically low rapidly, contributing to the next price cycle.

Conversely, if the global economy slides into a full-blown recession, inventories will rise and prices and spreads are likely to soften further.

For the moment, however, the oil market has returned to balance less than twelve months after one of the largest shocks since the World War Two.

Related columns:

– Oil prices slump as receding price-cap threat unmasks worsening demand (December 8, 2022)

– Oil prices fall on relaxed Russia price cap (December 6, 2022)

– Global recession a bigger risk to Russia’s oil revenue than price cap (November 11, 2022)

– Recession would make tough oil sanctions on Russia more likely (July 14, 2022)

John Kemp is a Reuters market analyst. The views expressed are his own

(Editing by Paul Simao)

((john.kemp@thomsonreuters.com; +44 207 542 9726 on twitter @JKempEnergy; Reuters Messaging: john.kemp.thomsonreuters.com@reuters.net))

Australian shares post biggest drop in over 2 months as banks slump

March 10 (Reuters) – Australian shares posted their biggest drop in more than two months on Friday, weighed by banking stocks, as investors feared prospects of further aggressive interest rate hikes by the US Federal Reserve ahead of the jobs report due later in the day.

The S&P/ASX 200 slipped 1.7% to 7,187.7 by 0020 GMT, set for its worst session since January 3. The benchmark was on track for a 1.3% slump for the week, clocking a fifth straight week of losses.

Investors were cautious before the US non-farm payrolls report for February, with expectations for large wage increases fuelling inflation worries.

Hawkish comments by Fed Chair Jerome Powell this week also heightened concerns about upcoming rate hikes aimed at reining in stubbornly high inflation.

Back in Sydney, financials slid 2.5%, set for their worst session in more than three weeks. The sub-index was on track for a 0.5% decline this week.

The country’s four largest banks fell between 2.5% and 2.9%.

Weak oil prices dragged energy stocks down 2.3% and the sub-index was set to record its worst week since last September. Sector majors Woodside Energy and Santos lost 2.2% and 1.8%, respectively.

Miners dropped 1.7%, in its fifth straight session of losses, with heavyweights BHP Group and Rio Tinto retreating 1.7% and 1.8%, respectively.

Tech stocks slipped 1.6%, tracking a fall in their Wall Street peers overnight.

ASX-listed shares of Block Inc dropped 4.9%.

Gold stocks were the only bright spot on the local bourse, advancing 2.0%, following strong bullion prices.

Sub-index majors Newcrest Mining and Northern Star Resources slid 1.3% and 3.2%, respectively.

New Zealand’s benchmark S&P/NZX 50 dropped 0.9% to 11,722.59, its lowest since February 27.

The country’s manufacturing sector expanded in February but remains below the long-term average, a survey showed.

(Reporting by John Biju in Bengaluru; Editing by Rashmi Aich)

BOJ set to keep ultra-low rates at Kuroda’s final policy meeting

TOKYO, March 10 (Reuters) – The Bank of Japan (BOJ) is set to maintain ultra-low interest rates on Friday and hold off on making major changes to its controversial bond yield control policy, leaving options open ahead of a leadership transition in April.

The meeting will be the last one to be chaired by Governor Haruhiko Kuroda, who leaves behind a mixed legacy with his massive stimulus praised for pulling the economy out of deflation – but straining bank profits and distorting market function with prolonged low interest rates.

With inflation exceeding its 2% target, the BOJ has been forced to ramp up bond buying to defend a 0.5% cap set for the 10-year bond yield – at the cost of distorting the shape of the yield curve and causing dysfunction in the bond market.

US Federal Reserve Chair Jerome Powell’s comments on Tuesday signaling the need for bigger-than-expected rate hikes also point to the likelihood Japanese yields will remain under upward pressure.

Many analysts thus see the days of yield curve control (YCC) numbered, though recent BOJ policymakers’ speeches underscore their preference to hold off on big policy changes at least until Kuroda’s successor, Kazuo Ueda, takes the helm in April.

“Under Ueda’s new leadership team, the BOJ will keep monetary conditions accommodative but tweak (YCC) to mitigate its side-effects,” said Mari Iwashita, chief market economist at Daiwa Securities.

“After conducting an examination of its policy framework, the BOJ will either abandon the 10-year yield target or shift to one targeting a shorter duration,” she said.

At the two-day meeting ending on Friday, the BOJ is set to maintain its short-term interest rate target at -0.1% and that for the 10-year bond yield around 0%.

Some market players bet the BOJ could widen the band set around the 10-year yield target, allowing the yield to rise up to 0.75%, from the current 0.5%, as early as Friday.

But many analysts polled by Reuters expect any tweak in YCC to happen after Ueda takes over as new governor.

Kuroda has repeatedly said consumer inflation, now running at double the pace of the BOJ’s 2% target, will begin to slow as the effect of past spikes in fuel and raw material prices fades.

Data released on Friday showed Japan’s wholesale prices rose 8.2% in February from a year earlier to mark the second straight month of year-on-year slowdown, heightening the chance the rise in consumer inflation will start to moderate in coming months.

The lower house of parliament on Thursday approved the government’s appointment of Ueda and his two new deputies, Shinichi Uchida and Ryozo Himino.

A lower house vote is expected later on Friday, with approval seen as a done deal due to the ruling coalition’s majority in both chambers of Diet.

Ueda will chair his first policy meeting on April 27-28, when the board will produce closely watched, fresh quarterly growth and price forecasts extending through fiscal 2025.

(Reporting by Leika Kihara; Editing by Sam Holmes)

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