SVP collapse continues to rattle markets

The fallout from the Silicon Valley Bank collapse continued to reverberate through markets yesterday with banking stocks in particular under pressure and sharp moves in USTs. US officials including President Joe Biden have been looking to reassure depositors and the Fed has pledged to make a review of its oversight of SVB and to see whether the bank had done the necessary stress testing as interest rates started to rise. US CPI inflation data for February is due out today but the major economic data point has been somewhat overshadowed by developments in the banking sector, with the likelihood of a 50bps hike by the Fed in March now very slim indeed and even a 25bps move coming under greater question.

India’s CPI inflation rate came in at 6.4% y/y in February, compared with 6.5% the previous month. This was in line with the consensus projection. Core inflation was at 6.2%, down from 6.3% in January, while food inflation rose from 6.2% to 6.3%.  Headline inflation in India had come back down within the Reserve Bank of India’s target range of under 6.0% in November and December, but the two overshoots in the first two months of the year makes another hike by the central bank at its April meeting more likely even as there are questions over an adjustment to the weighting. The repo rate currently stands at 6.5%.

Turkey’s current account deficit widened to a record of USD 9.85bn in January, from USD 5.91bn in December. The shortfall grew on the back of high energy import costs and elevated gold imports as the trade deficit widened by 38%.

Today’s Economic Data and Events

• 16:30 US CPI inflation, February, % y/y. Forecast: 6.0%
• 11:00 UK ILO unemployment rate 3mths, January. Forecast: 3.8%

Fixed Income

• Market moves in benchmark government bonds were at historic levels at the start of the week as investors sought out haven assets amid concerns over financial stability. The 2yr UST yield plummeted 61bps by the end of the day, settling at 3.9764% and its lowest close since September 2022. The 10yr yield fell by 30bps at one point to hit nearly 3.4% but then moved higher toward the close, settling at 3.5732%--a drop of 13bps. The 2s10s curve steepened by 48bps to settle at 41bps overnight compared with as wide as 108bps printed last week following Fed chair Jerome Powell’s testimony to Congress.
• Markets have also lowered their expectation for the terminal Fed Funds rate substantially and are more equivocal about the outlook for even the March FOMC meeting next week. The terminal rate is now expected at 4.8% by May and for cuts to take rates back to 4% by the end of the year. Just one week ago the peak in rates was set at 5.6%.
• Bonds in Europe matched the performance in Treasuries with the 2yr schatz yield sinking nearly 60bps at one point before it ticked up moderately toward the end of the day. Yields on the 2yr closed 40bps lower at 2.673%, still an eye-watering move, while the 10yr bund yield sank 25bps to 2.253%. Gilt yields fell 27bps to 3.36% while European markets were all substantially stronger.
• Emerging market bonds seemed to take the volatility generally in their stride with an index of USD-denominated bonds rising overnight while local currency markets held up in economies with no direct link to the unfolding issues in segments of the US banking system.

FX

• As bond markets slammed the door shut on the Fed’s future hiking path, currencies moved against the dollar. After some choppy two-way trading, EURUSD surged for a third day in a row, closing at 1.0731. GBPUSD moved even more, rallying by 1.2% to 1.2183 while USDJPY moved as a haven would be expected to, closing down 1.4% at 133.21. Swiss France also benefitted with USDCHF closing down by almost 1% at 0.9119.
• Commodity currencies also showed a strong performance against the dollar with USDCAD down 0.7% to 1.3731. That was the first gain for CAD in eight days. AUDUSD jumped 1.3% to 0.6668 while NZUDUSD added 1.5% to 0.622.

Equities

• Equity markets were somewhat mixed yesterday as investors continued to digest the fallout from the SVB banking turmoil in the US. There were strong gains in Hong Kong and China as the Hang Seng and the Shanghai Composite added 2.0% and 1.2% respectively, but the Nikkei closed 1.1% lower.
• Locally, the DFM lost 0.9% and the ADX closed 0.7% lower. The Tadawul dropped 0.8%.
• In Europe, banking stocks led losses and the major indices closed substantially lower: the FTSE 100, the CAC, and the DAX lost 2.6%, 2.9%, and 3.0% respectively.
• When the US opened later in the day, bets in some quarters that this turmoil would mean a pause by the FOMC at its upcoming rate setting meeting helped boost the interest rate sensitive NASDAQ, which ended the day up 0.5%, but the S&P 500 (0.2%) and the Dow Jones (0.3%) both closed down.

Commodities

• Oil prices sank in the wake of investors dumping risk assets. Brent futures fell 2.4% to USD 80.77/b, having at one point moved to nearly USD 79.50/b. WTI fell by 2.5% to USD 74.80/b. The release of the US CPI print later today will likely overwhelm any impact of fundamentals on the oil market with moves likely to mirror those in other high risk assets. OPEC will release its monthly oil market outlook later today but we’d expect any headlines to be subsumed by efforts to stave off financial contagion.