As markets struggled yesterday after the shocks of the collapse of two US lenders, traders increased their interest rate forecasts. Regulators scrambled for confidence in the American banking sector.
Two-year US Treasury yields have fallen so much in just a few days since Black Monday 1987. This was after traders reversed their bets that central banks would raise interest rates following Friday’s failure at Silicon Valley Bank. Signature Bank followed the Silicon Valley Bank’s lead over the weekend.
Washington created an emergency package to help customers get their money after the collapse of two regional lenders. To ensure that other lenders are able to meet all depositors’ needs, the US Federal Reserve announced the funding program.
While President Biden claimed that was “safe”, investors still drew the line on bank stocks around the globe.
The financial markets believe that the recent rapid rises in interest rates will stop abruptly to preserve financial stability. The possibility of a Fed interest rate increase of 50 basis points next week was eliminated by money markets, which had already priced in the Fed’s rise last week. According to CME’s FedWatch tool, traders believe that there is a 55% chance of a 25 basis-point increase in rates next week when Fed officials meet. Rates could remain at their current levels for 45 percent, according to CME’s FedWatch tool.
Mohamed El-Erian, an economist, said that “We are now living in a completely different world.” He spoke to CNBC, the financial news channel. “Markets have voted that the Fed will abandon its fight against inflation.”
A week ago, it was considered a near certainty that the Bank of England would raise UK rates by 25 basis points at its meeting this month. According to Eikon data, the probability is now at 66%.
US Treasury yields fell 53 basis points to 4.06 percent at one point. This was a drop of a full percentage point from Wednesday. This was the largest three-day drop since Black Monday.
The yields on European bonds, including UK gilts, fell, but not as dramatically. Yields are inversely related to prices. They reflect government borrowing costs and expectations.
The sudden shift in expectations for interest rates caught the dollar off guard. The greenback fell almost 1 percent against a basket currency to a one month low. This helped to boost the value of sterling, which rose 1.3% to $1.218, the highest level since February’s beginning. Sterling was only above $1.18 a few days back.
Investors chose to invest more in gold and silver despite all the uncertainty. Attracted by their “safe haven” appeal, they did so because of the metals’ safety. The price of gold rose 2.4% to $1,921.06 an ounce, its highest level since February. Silver rose 6.3% to $21.81 an ounce, platinum rose 4.6% to $997.60 per ounce, and palladium rose 7.8% to $1.485.74 per ounce.
Biden made an effort to reassure consumers and companies. He stated, “Rest assured. Our banking system is secure.” Your deposits are safe. I can also assure that we won’t stop here. We will do everything necessary to complete all of this.”
The president stated that his administration would not be supporting the executives or shareholders of bank failures, but he did not address customers. He stated that the bank’s management would be fired. Investors will not be protected. They took a risk, and investors lost their money when it didn’t pay off. This is how capitalism works.
The regional banking shares were in sharp focus with Western Alliance Bancorp falling 47.1 percent, Metropolitan Bank falling 43.8%, and PacWest Bancorp dropping 21.1 percent. First Republic fell 61.8 percent despite its statement that it wasn’t seeing large outflows.
In the midst of an international sell-off, the FTSE 100 fell 2.6% or 199.72 point to 7,548.63 The FTSE 100 has dropped 6 percent since it reached a record low less than a month back. The FTSE 250 dropped 2.8%, or 532.38 point, to 18,825. Barclays shares dropped almost 10% to 147 1/2 p in London. This extended their losing streak of five sessions. Aviva fell by 5.7% to 424 1/4 P, its largest one-day drop in over a year.
Stock markets in Europe fell by around 3 percent across Paris, Frankfurt, and Madrid. Stocks in Milan fell by more than 4%. The pan-European Stoxx 600 index saw its worst session since 2023, with a decline of 2.4%.
Investors were concerned that the bank Credit Suisse, a Swiss bank, was at risk of being infected by the SVB collapse. The shares of the bank fell almost 10%, or 24 centimes to SwFr2.26, and the cost of insuring its bonds against default hit a new high. Market turmoil struck just as Credit Suisse was already in trouble due to a string of scandals that have eroded investor confidence.
Leading indices in New York added to Friday’s losses. S&P 500 lost 0.2%, or 5.83 point, to 3,855.76. The Dow Jones industrial average dropped by 0.3%, or 90.50 point, to 31,819.14. However, the technology-focused Nasdaq closed up 0.5%, or 49.96 point, at 11,188.84.
Deutsche Bank’s George Saravelos warned that the financial market movements suggested America was more susceptible to recession after the Silicon Valley Bank bailout. “Competition for deposit is likely to intensify in the US bank system, leading to an upward trend in the bank-based financing cost and an additional layer of tightening to the real economy.
On Thursday, the European Central Bank will meet for its regular ratesetting meeting and market-watchers will be able to see the response of central bankers to financial instability. As the eurozone’s economy is less directly affected by the fallout of Silicon Valley Bank’s collapse, the ECB will likely raise its main interest rate 50 basis points.
Economists warn that global central banks must be cautious about responding to financial crisis by suddenly reversing inflation-fighting goals. This could risk putting the market interests above a legal mandate to maintain stable prices.
“In response to financial turmoil, the Fed reduced rates by 75 basis points in 1998. Jason Furman, an ex-chairman of President Obama’s Council of Economic Advisers stated that this fueled the bubble and contributed the 2001 recession. The Fed should be aware of the banking situation but not panicky when it is far from fulfilling its mandate.