Europe's bank shares plunge despite SVB rescue effort
Europe's bank shares have suffered their biggest fall in more than a year and bond markets saw a gigantic repricing of rate hike bets as global efforts to limit the fallout from the collapse of Silicon Valley Bank (SVB) failed to ease fears.
The dollar slid too as Wall Street heavyweights such as Goldman Sachs predicted the US Federal Reserve would no longer lift interest rates next week, capping the biggest three-day rally for short-dated Treasuries since 1987.
Europe's bank index tanked six per cent on Monday having shed 3.8 per cent on Friday. HSBC's London listed dropped 1.45 per cent after it said it would acquire the UK subsidiary of stricken Silicon Valley Bank for the token amount of Stg1.
At the weekend, the Fed and US Treasury announced a range of measures to stabilise the banking system and said depositors at SVB would have access to their deposits on Monday.
The Fed also 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.
In Asia, the ongoing concerns were seen in Japan's Topix bank index, which lost four per cent, while Singapore's largest banks also shed about one per cent.
"We are seeing a classic flight to safety," said Tom Caddick managing director at Nedgroup Investments. "Higher interest rates and a slowing economy was always going to bite."
US authorities have also taken over New York-based Signature Bank, the second bank failure in a matter of days.
Monday's rout left more than 99 per cent of companies listed on Europe's benchmark STOXX 600 trading in the red. Only three stocks evaded the fall, Qinetiq, Reckitt and Vantage Towers, up 0.4 per cent, 0.2 per cent and 0.1 per cent, respectively.
One glimmer of hope was that futures markets showed the Wall Street's benchmark S&P 500 opening fractionally higher later.
Such was the concern about financial stability that investors speculated the Fed would now be reluctant to rock the boat by lifting interest rates by a super-sized 50 basis points next week - and might not even hike at all.
Fed fund futures surged to price out any chance of a half-point hike, compared with about 70 per cent before the SVB news broke last week. Instead, futures implied a 14 per cent chance the Fed would stand pat.
The implied peak for rates came all the way down to 5.08 per cent, from 5.69 per cent last Wednesday, and markets were back to pricing in rate cuts by the end of the year.
Such talk, combined with the shift to safety, saw yields on two-year Treasuries rise seven basis points to 4.63 per cent, a world away from last week's 5.08 per cent peak.
Yields were down 66 basis points in just three sessions, a drop not seen since the Black Monday market crash in 1987.
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 index fell 0.3 per cent. The pound and euro both rose about 0.2 per cent while the safe-have Japanese yen surged more than one per cent.
Gold climbed almost one per cent as well to $US1,885 an ounce, having jumped two per cent on Friday. Oil prices lost over 1.5 per cent though with Brent back at 81.48 a barrel and US crude at $US75.28 per barrel.