Contagion fears

Market movers today

We start the week in a quiet fashion on the data front, but market focus remains on the collapse of Silicon Valley Bank (SVB) and the repercussions for the wider US banking system.

Later the this week the key data release for markets will be the US CPI for February on Tuesday, which will be crucial for Fed's decision to hike by either 25bp or 50bp at the next meeting. It is also time for another 50bp hike from the ECB on Thursday, but markets will pay attention to the communication for the May meeting (see also ECB preview: Higher for longer - now seen at 4%, 2 March).

The 60 second overview

Markets continue to be roiled by the collapse of Silicon Valley Bank (SVB). The freefall of its share price continued on Friday after an unsuccessful attempt to raise capital and a cash exodus from tech start-ups. Trading was later halted and SVB shut down by US banking regulators due to liquidity issues, making SVB the second-largest bank failure in US history, after the 2008 collapse of Washington Mutual. Markets continue to worry about contagion effects to other banks and the tech and start-up industry. Global bond yields collapsed in the risk-off move, while equities and the USD suffered.

Late Sunday night, the Fed, the US Treasury and the FDIC announced a series of emergency measures to limit the uncertainty stemming from the collapse of the SVB. The regulators will protect all the deposits at the SVB as well as the crypto-focused Signature Bank, which the authorities also closed on Sunday due to systemic risk concerns. In addition, the Fed announced a new Bank Term Funding Program (BTFP), which will provide financing for banks for up to one year against collateral valued at par. This could help banks access emergency financing without them having to sell assets with large unrealized losses, as was the case with SVB. Markets reacted positively to the news, with equity futures recovering overnight. That said, while the measures are substantial, it remains to be seen if they can restore confidence in the market over the coming days.

US labour market: Non-farm payrolls rose by 311,000 last month, more than expected but less than January's blowout print. However, the February jobs report was a mixed bag. Despite strong employment growth, wage growth cooled down to 0.2% m/m and the unemployment rate ticked up to 3.6% (from 3.4% in January), as labour force participation improved. The data muddied the water as the Fed decides whether to step up the pace of rate hikes, but in light of fragile risk sentiment we still favour a 25bp at the March meeting. Markets agree and now price in a less than 50% chance for a 50bp March hike. That said, a strong inflation print tomorrow could tip the balance again and will consequently be watched closely by markets.

Equities: Equities ended Friday lower and MSCI world down almost 4% last week. While last week started with the overheating narrative dominating, it ended with fear of recession and banking crisis on Thursday and Friday. Hence, flight to safety, defensives and quality, but not in the usual regional i.e., flight to safety in US equities. US is the centre of the storm, both in terms of the overheating narrative and the failure of SVB. Hence US equities continued to underperform with uncertainty increasing and VIX closing on 25. Friday action in US showed Dow -1.1%, S&P 500 -1.5%, Nasdaq -1.7% and Russell 2000 -2.95%. With US authorities stepping in with a backstop, we can very well see a reversal of much of the Thursday and Friday moves in equities as this week of trading begins. Asian markets are very mixed this morning with Hang Seng sharply higher, while Nikkei 225 is lower. US futures sharply higher, while European futures are showing smaller gains this morning.

FI: Global bond yields collapsed on Friday on the back of the increased uncertainty in the financial sector after of collapse of SVB. 10Y Treasuries declined some 30bp since Thursday, while 2Y yields are down some 50bp. There was a solid flight-to-quality as both Bunds and Treasuries rallied vs. swaps.

FX: Fears of systemic risks spread through asset markets following the news on Silicon Valley Bank's suspension. US rates fell and EUR/USD is once again trading above 1.07, whereas risk-off has pulled USD/JPY below 135 Notably and despite this, Scandies are starting the week off recent (Friday's) highs.

Credit: In short - change of sentiment! Silicon Valley Bank became the biggest US bank failure in more than a decade after a tumultuous week that saw an unsuccessful attempt to raise capital and a cash exodus from the tech start-ups that had fuelled the lender's rise. Following the turmoil iTraxx Main widened 6bp to 82bp while iTraxx X-over widened 30bp to 426bp.