Instant view: Bank stocks tank, markets rethink rate-hike path

(Reuters) – Global bank shares slid on Monday even as U.S. authorities moved swiftly to stem contagion following the collapse of startup-focused Silicon Valley Bank.

HSBC purchased SVB’s UK arm for a symbolic £1. This rescued a major lender in technology start-ups and helped curb the fallout of the largest bank collapse since the financial crisis.

Despite this, investor concerns regarding the impact on financial markets were not addressed by the measures taken to mitigate the effects.

The yields on safe-haven bonds like U.S. Treasuries or German Bunds dropped sharply while the money markets quickly reduced their bets about the potential for rate increases from the Federal Reserve or the European Central Bank.

MARKET REACTION:

STOCKS – European banking stocks last fell 6%, UK banks lost over 4%. U.S. stock futures were positive. Credit Suisse shares reached a new record low. BONDS. U.S. Treasury Treasury yields on two-year bonds fell 35 bps to their highest three-day decline since 1987. Germany’s 2-year bond yield plunged more than 30bps. This was the largest one-day fall in Germany since 1995.

FOREX: While the dollar fell over 1% against the yen and the euro rose 0.4% to $1.067, it was still up 0.1%.

COMMENTS:

MARK DOWDING, CHIEF INVESTMENT OFFICER, BLUEBAY ASSET MANAGEMENT, LONDON:

“We don’t think that a lot of the issues that are impacting U.S. banks are ones that will be manifested in European banks.

“We are less concerned about the European funding and accounting practices than the U.S.

“However, there is a sense of contagion and where we see a repricing around financials is leading to a repricing across markets.

“We will not change our position on banks across our funds. However, we tend to be more constructive about European banks than the U.S.”

JEROME LEGRAS, HEAD OF RESEARCH AT AXIOM ALTERNATIVE INVESTMENTS, PARIS

“Market movements are not as dramatic as they seem, because European banks have a better interest-rate risk management system than U.S. regional banks. It is a good thing that people are starting to pay attention to interest rate risk. It’s something that needs to be monitored, and some investors were a little complacent in Japan or the U.S.

“We’ll see how it changes the Fed path, but I definitely can’t escape the feeling that one reason for ditching the moral hazard rhetoric and offering the facility to banks is that the Fed wants to be free to continue to hike should it want to and not be constrained by banks’ balance sheets.”

JAN VON GERICH CHIEF ANALYST NORDEA, FINLAND

“The ECB certainly is not going to stop on the basis of what we know now. If the markets aren’t cooled down, then maybe they will have to reconsider.

“On the margin, I believe the Fed will continue to increase its rate of interest by 25 basis point next week. However, the debate about whether they will hike by 25, 50 or 25 is now over.

“The rate hikes will continue. Of course, what happens further out, if it’s right to take out some of the pricing further out, there is of course a case for that.

“The Fed won’t increase volatility if markets are in a crisis or very volatile environment. For now, I believe 25 bps is a reasonable base.”

(Reporting by the EMEA finance and markets team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)