Business Maverick

Business Maverick

Asian stocks drop, led by banks amid rates turmoil: markets wrap

Asian stocks drop, led by banks amid rates turmoil: markets wrap

Asian equities extended declines on Tuesday, led by weakness in financial stocks as the collapse of Silicon Valley Bank continued to reverberate across global markets.

A gauge of Asian shares fell 1.7% and headed for the lowest close since early January. Financial stocks were the biggest drag as investors weighed risks in the sector. The KBW Bank Index on Monday logged its biggest fall since the start of the Covid-19 pandemic, underscoring the dangers.  

The two-year Treasury yield rebounded more than 15 basis points but remained markedly lower than levels late last week. It logged the largest three-day retreat since Black Monday of October 1987 at the close of US trading.

Yields on New Zealand’s two-year government bond tumbled more than 20 basis points, as did the rate on Australia’s three-year maturity. Japan’s five-year yield declined to the lowest since early December.

A gauge of dollar strength rose 0.2% after erasing its gains for the year on Monday amid a reassessment of the outlook for interest rates.

Swaps traders are now pricing a less than 60% chance the Federal Reserve will hike by another quarter percentage-point later this month.

“A policy mistake is hands down the biggest risk in the market,” Mary Manning, global portfolio manager for Alphinity Investment Management, said on Bloomberg Television. “Controlling inflation but also addressing the fact there is some instability in the banking system is difficult.”

Goldman Sachs economists as well as asset managers at the world’s largest actively managed bond fund from Pacific Investment Management said the Fed could take a breather on the policy rate following the collapse of SVB. Nomura economists took it one step further, saying the Fed could cut its target rate next week.

Key data

Traders are looking to the US consumer price index report later in the day for cues that may trigger further shifts in bets on the Fed’s next move.

“If this CPI print within the next 24 hours is in line with consensus or no worse than consensus then market sentiment can calm, but if we get a strong number, all bets are off the table,” Andrew Ticehurst, senior economist and rates strategist for Nomura Australia, said on Bloomberg Television. “That would put the Fed in a really difficult position because the data would say you need to hike and we’ve got financial stability risks pointing the other way.”

The S&P 500 closed on Monday down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.

Oil declined ahead of the inflation data as the biggest US bank collapse since 2008 continued to ripple through financial markets, while Asian energy shares fell. 

Gold edged lower in Asia after surging more than 5% over the three previous sessions as the collapse of a major US bank spurred a flight to haven assets.

The failure of Silicon Valley Bank, combined with a sharp drop in Treasury yields and dollar weakness, has been a boon for bullion. Its 2.4% jump on Monday was the largest since November. The greenback rose for the first time in four sessions on Tuesday, weighing on the precious metal.

As well as the banking crisis, gold is drawing support from fresh expectations the Federal Reserve will be forced to temper aggressive monetary tightening due to risks emanating from SVB. US 10-year bond yields have fallen more than 40 basis points since Wednesday, a positive for non-interest bearing bullion.

Drivers for gold include “concerns about potential systemic risk” as potential deflationary and recessionary risks mount, Citigroup analysts including Aakash Doshi said in a note. 

Traders will be closely watching US inflation data due later on Tuesday, with the market now expecting the banking-sector turmoil will prompt the Fed to implement a quarter-point hike at its March 21-22 policy meeting, rather than return to a half-point increase. 

While the CPI data “remains critical, we view recent market events as more structurally supportive for gold prices,” Citigroup’s Doshi said in the note. BM/DM

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