LONDON/NEW YORK (Reuters) - The health of the global banking sector as interest rates rise remained in the spotlight on Tuesday but investors appeared to take heart that the risk of market contagion from the Silicon Valley Bank meltdown was ebbing.
Markets rebounded after two dramatic trading sessions. European banking stocks rallied 2.5% and a gauge of stress in the banking system retreated from highs seen earlier in the session.
U.S. regional bank stocks jumped sharply.
Wall Street shares surged, while data showed U.S. consumer prices increased in February.
MARKET REACTION:
STOCKS: The tech-heavy Nasdaq closed up 2.14%, while the S&P 500 rose 1.6%BONDS: U.S. Treasury 2-year note yields jumped to 4.244% , while the 10-year note yield rose to 3.6778%
FOREX: The euro was steady around $1.0735 late in New York
COMMENTS:
MATTHEW KEATOR, MANAGING PARTNER, THE KEATOR GROUP, A WEALTH MANAGEMENT FIRM, LENOX, MASSACHUSETTS
"The market is having an opportunity to digest some of the news over the last couple of days."
"(Investors) are seeing a coordinated effort with various government agencies, and with hindsight, they’re feeling as if things have contained themselves a bit."
KIT JUCKES, CHIEF CURRENCY STRATEGIST, SOCIETE GENERALE
"I don't think this is a systemic global banking issue. If it's an issue, it's an issue of a smaller but less regulated bank that has been growing very fast on the back of being less regulated in a stable environment that has turned nasty."
CHRIS CRAWFORD, PORTFOLIO MANAGER, ERIC STURDZA INVESTMENTS
"Our view is that SVB has some company-specific features that made it particularly vulnerable, but there are also systemic issues for all banks and the broader economy.
"However, the larger problem is one of confidence. Bank customer confidence has eroded with the writedowns and falling stock prices and they have begun to fear for the safety of their deposits. Even if the banks have sufficient capital to absorb the writedowns, the fears can become a self-fulfilling action if enough customers pull deposits, since deposits are a major source of bank funding that can be even larger than the magnitude of the treasury writedowns.
"SVB situation is exacerbated, since it holds substantial deposits for many young tech startups that have been burning cash for years and must rapidly draw down their cash balances to keep their businesses operating since equity capital markets have been largely closed to raising new capital. Banks are now faced with the classic problem that has threatened banks throughout history: a mismatch in terms between assets and liabilities."
JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK, LONDON:
"By the time the Fed meets next week, not only are we going to have clarification on whether or not they're still going to use monetary policy to fight inflation and use these other tools to deal with the financial stress, but we'll also by then have a far better understanding as to what the US Treasury and the Fed announced over the weekend, whether or not that's enough.
"Those announcements over the weekend were there to stop the systemic risk. They were there to stop a run on the banks. Hopefully we'll go over the next few days, whether or not the financial system is going to calm down or not. And that is going to be instrumental, I think, for driving all asset classes.
"Quite clearly the markets and in the state of flux and uncertainty. And I think the market needs time to assess the safety of the rest of the financial system."
PATRICK GHALI, MANAGING PARTNER OF HEDGE FUND ADVISORY FIRM SUSSEX PARTNERS, ZURICH
"I think the markets are very fragile at the moment and grasping at straws. In such an environment anything can be the catalyst. Today everyone is grappling with what this means for the path of rates and hence inflation.
"I doubt this was style drift by one bank, but rather something that other players also did when rates were at 0. Same goes for PE and private funds. More and more of these issues will start popping up, and I also think that we will start to see that the economy is perhaps less solid than what some people think. I expect savings and the consumer to get exhausted soon, and hence earnings to get revised down etc. All this bodes badly for markets which are still expensive.
"For short sellers the danger is in the irrational and volatile markets we now have. You can easily get squeezed in such an environment, until fundamentals come to the fore, and no one knows when that is. Some will get it right though and make a lot of money. Predicting who that is will be the hard part."
LUCA FINA, HEAD OF EQUITY, GENERALI INSURANCE ASSET MANAGEMENT, MILAN
"Notwithstanding the movement the sector had in the past couple of trading days, the read across for European Banks should in theory be very limited given the peculiarity of the SVB financial business, the different regulatory framework and the solid liquidity ratios / buffers of the big euro banks.
"However, the recent events remind investors how complex the sector is, further eroding their confidence in it. Furthermore, the scenario of further increases in rates, that would have improved the profitability of the sector, could be partially at risk, although given the very low valuation and good earnings momentum would suggest that it is far from being priced for perfection.
"In general, looking at the European markets in the last few trading sessions, it seems more a generalized “futures driven” risk off move and a profit taking affecting almost all sectors after a strong run year-to-date, clearly with the banks as epicenter, rather than a selective liquidation based on the possible direct and indirect implications of the SVB case.
"Investors seemed to be worried that the effects of such steep and coordinated tightenings are now emerging and that central banks will have to deal with them."
SAMY CHAAR, CHIEF ECONOMIST, LOMBARD ODIER, GENEVA
"Up to last week the only thing the Fed had to worry about was inflation, and looking at the data from Friday (U.S. payrolls) and today (U.S. CPI) in my view the odds would have favoured a 50 basis points rate increase next week and a higher peak policy rate. But financial stability has come into play, and the need to be cautious favours a 25 bp hike, and stay in wait and see mode until May.
"It’s been an indiscriminate sell off in banking stocks, the financial sector repriced everywhere. Where I see European financials are maybe better off than their U.S. counterparties is that regulation has been stricter and so they are in a different place. A potential blow up in Europe would come from a different source."
BRIAN NICK, CHIEF INVESTMENT STRATEGIST, NUVEEN, NEW YORK
"Assuming we've seen the worst of the banking sector fallout, they (the Federal Reserve) are going to keep hiking for the next couple of meetings after this."
"We had been underweight government bonds, interest rate sensitive bonds, coming into this. We've been preferring to take credit risk over interest rate risk. I suspect we're going to be doubling down on that.
"They (Fed officials) are doing different things with their left and their right hand....they're basically making it easier for banks to borrow money for a long time from them.... That policy, unless it's offset someplace else on the Fed's balance sheet, is going to be adding to the money supply and potentially pushing inflation is a bit higher."
"So the Fed will need to figure out a way to drain that back...they want to get aggregate demand growth slower and they want to get financial conditions tighter. They just don't want it to happen like this (following the collapse of SVB).
"I think a lot of banks, whether they're forced to or whether they just feel like its good business, are going to start paying higher rates on deposits to retain those depositors....so, the government forcing your hand on the regulation, different liquidity capital requirements, paying into a larger pool for FDIC insurance, all these things would be negative across the board for banks but would benefit larger banks in a relative sense."