(Bloomberg) — Traders are bracing for the risk of more turbulence after the biggest U.S. bank collapse since the 2008 financial crisis sent shockwaves through markets.
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The unraveling of SVB Financial Group’s Silicon Valley Bank was driven in large part by the fallout from higher US interest rates, prompting questions about whether other institutions could also be at risk as investors debate how much longer the US central bank is likely to will tighten the policy. . Meanwhile, the outlook for the economy—and likely policy responses to it—remains in flux.
Currency markets will be the first to take focus as the new week begins, with trading in the Asia-Pacific region beginning on Monday. Traders will be keen to see whether safe-haven currencies such as the Swiss franc and Japanese yen extend the gains they made on Friday and whether the dollar continues to move lower on expectations of shorter government interest rates.
“The market is swinging from theme to theme, revealing underlying fragility,” JPMorgan Chase & Co. strategists, including Meera Chandan, wrote in a note to clients on Friday.
Attention will be sharply focused on anything that hints at the next steps of the Federal Reserve and its global peers – or hints at wider spillover into the US banking sector beyond the SVB.
Federal Deposit Insurance Corp. and the central bank was considering creating a fund that would allow regulators to freeze more deposits at troubled banks, according to people familiar with the matter. Meanwhile, U.S. regulators overseeing SVB’s breakup were racing to sell assets and make some of customers’ uninsured deposits available as soon as Monday, people familiar with the matter said.
For Fed policy watchers, the main focus of the week will likely be Tuesday’s consumer price inflation. In the eurozone, the key event is Thursday’s decision on the European Central Bank, where officials are widely expected to raise interest rates by half a point.
It was a wild trip to the markets last week. Expectations for Fed rate hikes rose in the wake of hawkish comments from Chairman Jerome Powell, only to reverse as fears about the banking sector and a mixed jobs report helped fuel a rally in Treasuries. By the end of the week, the market was back to pricing a quarter-point Fed hike as the most likely outcome, having at one point settled on the idea of a half-point.
The two-day drop in the two-year Treasury yield, seen on Thursday and Friday, was of a magnitude last seen amid the 2008 global crisis, while an index of US bank shares notched its worst week since the early part of Covid pandemic in 2020. The Bloomberg Dollar Spot Index fell as much as 0.9% at one point Friday, the biggest intraday drop since early January. It ended just 0.4% lower on the day and remained up for the week.
The SVB situation is a “timely reminder” that when the Fed is focused on reining in inflation with rate hikes, “it often ends up breaking,” Capital Economics’ North American chief economist Paul Ashworth wrote in a note Friday. “Whether the problems first appear in the real economy, asset markets or the financial system, they can trigger a negative feedback loop that develops into a hard landing that takes them all out.”
China will also be in focus for many traders as the week gets under way following the re-appointment of several top economic officials. People’s Bank of China Governor Yi Gang, 65, will remain in his post, as will the finance and commerce ministers. The detention of Yi and others – announced at the National People’s Congress, the annual parliamentary gathering – surprised analysts who expected a major reshuffle. Meanwhile, He Lifeng, a close ally of President Xi Jinping, was named vice premier, signaling that he could replace Liu He as the country’s top economic official.
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