By Chris Prentice and Nell Mackenzie
NEW YORK/LONDON (Reuters) -Wall Street tumbled on Monday and European shares were on track for their largest one-day rout in three months, as global efforts to limit the fallout from the collapse of Silicon Valley Bank (SVB) failed to ease fears.
The U.S. dollar slid and bond markets saw a gigantic repricing of rate hike bets. Expectations rose for a pause in interest rate hikes in March, with Wall Street heavyweights such as Goldman Sachs (NYSE:GS) predicting the U.S. Federal Reserve would no longer lift interest rates next week.
Gold prices rose on safe-haven buying. [GOL/]
The Dow Jones Industrial Average fell 68.15 points, or 0.21%, to 31,841.49, the lost 15.59 points, or 0.40%, to 3,846.00 and the lost 9.50 points, or 0.09%, to 11,129.39. The Dow Jones Industrial Average fell 68.15 by 10:24 a.m. EDT (1424 GMT).
The MSCI world equity index, which tracks shares in 49 nations, lost 0.6%.
Europe’s bank index slumped over 6% having shed 3.8% on Friday. HSBC’s London listed dropped 1.45% after it said it would acquire the UK subsidiary of stricken Silicon Valley Bank for the token amount of 1 pound ($1.21).
Over the weekend, the Fed and U.S. Treasury announced a range of measures to stabilise the banking system and said depositors at SVB would have access to their deposits on Monday.
“When a step (is taken) this big, this quickly, your first thought is crisis averted. But your second thought is, how big was that crisis, how big were the risks that this step had to be taken?” said Rick Meckler, partner at Cherry Lane Investments. [.N]
The Fed also 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.
“We are seeing a classic flight to safety,” said Tom Caddick managing director at Nedgroup Investments. “Higher interest rates and a slowing economy was always going to bite.”
U.S. authorities have also taken over New York-based Signature Bank, 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.
HEADACHE FOR THE FED
Such was the concern about financial stability that investors speculated the Fed would now be reluctant to rock the boat by lifting interest rates by a super-sized 50 basis points next week – and might not even hike at all.
Traders currently see a 50% chance of no rate hike at the Fed’s meeting next week, with rate cuts priced in for the second half of the year.
While Goldman Sachs said in a note that its analysts no longer expect the Fed to deliver a rate hike at its next meeting on March 22, others remained cautious.
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The volatility in markets should become clearer once central banks including the ECB, Fed and Bank of England can set out their next steps, said James Rossiter, head of global macro strategy at TD (TSX:TD) Securities in London.
“Other non-affected banks may take a risk adverse approach to lending which may tighten financial conditions and do some f the Fed’s work for them,” he said adding that central banks before rate decisions go into a quiet period, unable to guide the markets on their next step.
“When they do get around to giving their views a lot of today’s confusion will end. It’ll be crystal clear official statements that the economy and markets can take guidance from,” he said.
The yield on benchmark 10-year Treasury notes rose to 3.4941% compared with its U.S. close of 3.695% on Friday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 4.047% compared with a U.S. close of 4.588%.
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 index, which measures the greenback’s value against a basket of currencies, fell 0.8%. The pound and euro rose around 0.7% and 0.6%, respectively.[/FRX]
Gold climbed, with spot prices last up over 2%, extending a rally begun at the end of last week. [GOL/]
Elsewhere in commodities, oil prices dropped 2.3% though and U.S. crude sliding 2.6%.
($1 = 0.8296 pounds)
