U.S. stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), though investors were also still favouring the safety of sovereign debt.
In a joint statement, the U.S. Treasury and Federal Reserve announced a range of measures to stabilise the banking system and said depositors at SVB (SIVB.O) would have access to their deposits on Monday.
The Fed said it would make additional funding available through a new Bank Term Funding Program, which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.
The moves came as authorities took possession of New York-based Signature Bank (SBNY.O), the second bank failure in a matter of days.
Analysts noted that, importantly, the Fed would accept collateral at par rather than marking to market, allowing banks to borrow funds without having to sell assets at a loss.
“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.
“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” he added. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
Investors reacted by sending U.S. S&P 500 stock futures up 0.9%, while Nasdaq futures rose 1.1%.
Yet, such was the concern about financial stability, that investors speculated the Fed would now be reluctant to rock the boat by hiking interest rates by a super-sized 50 basis points this month.
Fed fund futures surged in early trading to imply only a 28% chance of a half-point hike, compared to around 70% before the SVB news broke last week.
The peak for rates came all the way back to 5.11%, from 5.69%, last Wednesday, and markets were even pricing in rate cuts by the end of the year.
That, combined with the shift to safety, saw yields on two-year Treasuries dive 47 basis points on Thursday and Friday to stand at 4.58%, a long way from last week’s 5.08% peak.
Treasury 10-year bond futures added another 6 ticks on Monday, having been up over 20 ticks at one stage in hectic early trade.
“Accelerating your pace of hikes in the face of a significant bank failure may not be the wisest play for the Fed, especially if subsequent problems emerge stemming from similar root causes – underwater rates portfolios,” said John Briggs, global head of economics at NatWest Markets.
Still, much will depend on what U.S. consumer price figures reveal on Tuesday, with an obvious risk that a high reading will pile pressure on the Fed to hike aggressively even with the financial system under strain.
The European Central Bank meets on Thursday and is still widely expected to lift its rates by 50 basis points and to flag more tightening ahead, though it will now have to take financial stability into account.
In currency markets, the dollar dipped 0.6% on the safe-haven Japanese yen to 134.20 , while easing 0.6% on the Swiss franc . The euro firmed 0.5% to $1.0698 as U.S. yields dropped.
Gold climbed 0.8% to $1,882 an ounce , having jumped 2% on Friday.
Oil prices edged higher, with Brent up 10 cents at $82.88 a barrel, while U.S. crude rose 26 cents to $76.94 per barrel.