US stock futures rise as the Fed stabilizes banks

  • The US authorities are working to stabilize the banks
  • Markets are speculating on less aggressive Fed hikes
  • Short-term Treasury yields decline, Federal Reserve futures jump

SYDNEY (Reuters) – U.S. stock futures rose in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of a Silicon Valley bank, while investors bet future U.S. interest rate hikes would be less drastic now.

In a joint statement, the US Treasury and the Federal Reserve announced a set of measures to stabilize the banking system and said that depositors of the SVB (SIVB.O) will be able to access their deposits on Monday.

The Fed said it would provide additional financing through a new Bank Term Funding Program, which would provide loans of up to one year to depository institutions, backed by Treasury bills and other assets held by those institutions.

The moves came as authorities seized Signature Bank of New York (SBNY.O), the second bank to lose in a matter of days.

Most importantly, analysts noted, the Fed would accept the guarantees at par rather than register them in the market, allowing banks to borrow money without having to sell assets at a loss.

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“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.

“Logically, this should be enough to prevent any infection from spreading and more banks to close, which can happen in the blink of an eye in the digital age,” he added. “But contagion has always been about irrational fear, so we would like to stress that there is no guarantee that this will work.”

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Investors reacted by sending US stock futures on the S&P 500 down 1.2%, while futures on the Nasdaq were up 1.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) remained flat as investors pondered the consequences for regional markets.

Japan’s Nikkei (.N225) fell 1.1% in choppy trading, while South Korea’s index (.KS11) rose 0.1%.

Such was the concern about financial stability that investors speculated that the Fed would now be reluctant to turn the tide by raising interest rates by a hefty 50 basis points this month.

Fed fund futures rose in early trade to imply only a 17% chance of a half point hike, compared to about 70% before the SVB news broke last week.

Peak rates returned to 5.14%, from 5.69%, last Wednesday, and markets were even pricing in a rate cut by the end of the year.

That, along with the shift to safety, sent the two-year Treasury yield down to 4.51%, off from last week’s peak of 5.08%.

However, long-run returns rose as the curve steepened.

“Accelerating the pace of increases in the face of a major bank failure may not be the wisest play for the Fed, especially if subsequent problems arise from similar root causes — underwater interest rate portfolios,” said John Briggs, global head of economics at NatWest. markets.

However, a lot will depend on what US consumer price numbers reveal on Tuesday, with the clear risk that a higher reading will put more pressure on the Fed to rally even as the financial system comes under pressure.

The European Central Bank meets on Thursday and is still widely expected to raise interest rates by 50 basis points and to signal further tightening ahead, although for now it will have to take financial stability into account.

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In currency markets, the dollar was down 0.3% against the safe-haven Japanese yen, to 134.63, although that was far from an early low. The dollar fell 0.4% against the Swiss franc, while the euro settled down 0.4% to $1.0690, with short-term US yields declining.

Gold rose 0.6% to $1,879 an ounce, after jumping 2% on Friday.

Oil prices rose, with Brent rising 10 cents to $82.88 a barrel, while US crude rose 26 cents to $76.94 a barrel.

Reporting from Wayne Cole. Editing by Diane Craft and Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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