World markets set for aftershocks as SVB collapse ripples out (updated)

Rothschild & Co SCA

12/03/2023 19:15

(Updates with quote, latest news)
    By Dhara Ranasinghe
       LONDON, March 12 (Reuters) - Markets were set for a
bumpy ride this week as the fallout from collapsed
startup-focused lender Silicon Valley Bank (SVB), the biggest
U.S. bank failure since the 2008 financial crisis, coincides
with key economic data and policy meetings. 
    U.S. February inflation numbers are due out on Tuesday,
followed by the UK's budget on Wednesday and the European
Central Bank's interest-rate meeting on Thursday. 
    "There's a rough ride ahead," said Pooja Kumra, senior
European and UK rates strategist at TD Securities in London.
    U.S. stock market volatility as measured by the "fear
index," the VIX  .VIX , had already shot up on Friday to its
highest since October, while the ICE BofA Move Index  .MOVE , a
measure of volatility in the U.S. fixed income market, rose to
its highest since mid-December.
    Stock markets in the Middle East ended lower on Sunday, with
the Egyptian bourse leading the declines. In Qatar, almost all
the shares were in negative territory, including Qatar Islamic
Bank  QISB.QA , which tumbled 3.9%. 
    In another sign of possible contagion to other assets,
stablecoin USD Coin (USDC) lost its dollar peg and slumped to an
all-time low on Saturday. It later recovered most of its losses
after Circle, the firm behind it, assured investors it would
honour the peg despite exposure to Silicon Valley Bank.
    Still, unease about the banking sector is likely to linger. 
    U.S. Treasury Secretary Janet Yellen on Sunday said she was
working with regulators to respond to the implosion of SVB. 
        U.S. authorities are 
    considering
     safeguarding all uninsured deposits at Silicon Valley Bank,
weighing an intervention to prevent what they fear would be a
panic in the U.S. financial system, the Washington Post reported
on Sunday, citing three people with knowledge of the matter.
  
    But investors could be going into Monday's trading day with
little time to digest the latest developments. 
    SVB could have a domino effect on other U.S. regional banks
and beyond. U.S. regional and smaller bank shares were hit hard
on Friday. The S&P 500 regional banks index  .SPLRCBNKS  dropped
4.3%, bringing its loss for the week to 18%, its worst week
since 2009.
    "Investors hate uncertainty and surprises, and this was a
surprise that has created even more uncertainty," said Michael
Farr, chief executive of investment advisory firm Farr, Miller &
Washington in Washington, D.C. "If there’s no news or no buyout
between now and Monday, Wall St may be in for some volatility."
    
    POTENTIAL HIT 
    Britain's government on Sunday was scrambling to minimize
the damage on the country's tech sector. Prime Minister Rishi
Sunak said the British government was working to find a solution
to limit the potential hit to companies resulting from the
failure of SVB's UK subsidiary.
    Advisory firm Rothschild & Co is exploring options for the
subsidiary, as insolvency looms, two people familiar with the
discussions told Reuters. The BoE has said it is seeking a court
order to place the UK arm into an insolvency procedure.
     In Asia, the SVB failure has left many Chinese funds and
tech start-ups in the lurch, as the bank was a key funding
bridge for groups operating between China and the U.S, the
Financial Times reported on Sunday.
    The Chinese joint venture of SVB said on Saturday it has a
sound corporate structure and an independently operated balance
sheet.
    Having ramped up expectations for further interest rate
hikes in the United States and Europe, investors are
contemplating whether turmoil in the banking sector could force
central banks into a re-think.
    Investors will be laser-focused on the ECB which looks set
to deliver another hefty interest rate hike on Thursday. A
surprise surge in underlying inflation in February has left
policymakers fretting that price pressures could prove
persistent.
    The ECB will be vigilant to the risks of possible contagion
and will make sure liquidity is plentiful in the system, said
Marchel Alexandrovich, European economist and partner of
Saltmarsh Economics. 
    And if there is a difficult week in the markets, ECB
President Christine Lagarde may "deliver a somewhat more
cautious message," he said. 
    UK finance minister Jeremy Hunt's UK budget may be
overshadowed by the SVB fallout in Britain. Hunt is expected to
prioritise keeping public finances steady, resisting giveaways
that could destabilise sterling, stocks or gilts.
    But wide estimates for new public borrowing needs make the
outlook for government bonds uncertain.  

 (Reporting by Dhara Ranasinghe in London; Additional reporting
by Ira Iosebashvili in New York; Editing by Elisa Martinuzzi,
David Holmes and Diane Craft)
 ((Elisa.Martinuzzi@thomsonreuters.com;))