By Tom Westbrook
SINGAPORE, March 10 (Reuters) – Falling bank shares sent Asian markets lower on Friday, while bonds rose and expectations for U.S. interest rate hikes were cut after a surprise capital raise at a Silicon Valley startup lender sparked fears of broader stress in the banking system.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3% to a two-month low, with banks and technology shares in Hong Kong leading losses, while futures in London and Europe fell more than 1% each.
Japan’s Nikkei lost 1.3% and S&P 500 futures fell 0.4% in early trade after the cash index fell 1.8% and fell below its 200-day moving average.
The US dollar rose and Treasuries on the short end extended strong gains overnight – driving two-year yields down another nine basis points to 4.8068%.
Fed Funds futures also rose sharply, pulling the market-implied peak in U.S. interest rates from above 5.6% to just below 5.5%, pricing in about a 50% chance of a Fed hike of 50 basis points this month from more than 70% a day earlier.
The moves followed SVB Financial Group, parent of startup lender Silicon Valley Bank, noting higher-than-expected “cash burn” from customers, falling deposits and rising capital costs. It announced a share sale hours after crypto-focused lender Silvergate said it was shutting down.
SVB stock was still down after hours and has lost about 70% of its value in 24 hours. The Titans’ shares were dragged down by it, with JP Morgan Chase & Co losing 5.4%, Citigroup falling 4.1% and major lenders in Asia and Australia falling – albeit more modestly – on Friday morning.
“I think there is speculation that there are broader problems within the US banking system, or there is the potential, and that has caused a rethinking of Fed policy,” ING economist Rob Carnell said in Singapore.
“The thinking is that if what the Fed is doing is causing this distress, then maybe they won’t do much more,” he said.
“But it’s a big move on the back of what appears to be some pretty woolly speculation … which just shows how jittery the markets are right now, and this has spilled over into all the other markets.”
Adding to nerves, traders were wound up ahead of a Bank of Japan (BOJ) meeting on Friday – Governor Haruhiko Kuroda’s last in charge – and US jobs data later in the day, which is likely to set the tone for the US rates outlook.
The BOJ is likely to maintain ultra-low interest rates and hold off on major changes to its rate control policy, leaving options open ahead of a leadership transition in April.
But as long-dormant Japanese inflation has picked up, and after a surprise easing of a cap on 10-year yields in December, speculation about changes is rife and dollar/yen volatility targets have risen. The yen moved slightly higher to 135.86 ahead of the BOJ’s policy announcement.
Ten-year Japanese government bond futures trailed global bonds higher in morning trade, with 10-year cash bonds yielding 0.495%, just below the 0.5% limit.
Elsewhere, surprisingly high US jobless claims provided a weak entry to broader US employment data due later on Friday, putting some pressure on recent dollar gains.
The numbers loom as a crucial barometer of the health of the US labor market and the direction of interest rates, after Fed Chairman Jerome Powell warned that interest rates could rise further and faster if data show it is necessary to tame inflation.
The euro held modest gains overnight at $1.0594.
Bitcoin nursed losses just above the psychological $20,000 level as the fallout from Silvergate’s demise weighs on the broader sentiment in digital assets.
Brent crude futures were set at $81.55 a barrel. barrel and gold at $1,831 per ounces.
(Editing by Simon Cameron-Moore)