Futures higher but world markets set for aftershocks as SVB collapse ripples out

© Reuters. The main entrance of Silicon Valley Bank is seen in Menlo Park, California U.S. March 10, 2023. REUTERS/Michaela Vatcheva

By Dhara Ranasinghe and Scott Murdoch

SYDNEY (Reuters) -Markets were set for a bumpy ride this week as the fallout from collapsed startup-focused lender Silicon Valley Bank (SVB), the biggest U.S. bank failure since the 2008 financial crisis, coincides with key economic data and policy meetings.

S&P500 futures rose 1.4% after U.S. authorities guaranteed SVB customers would have access to their deposits starting on Monday. Futures later eased to be up 0.7%

"No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer," a statement from the U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corp said.

In Australia, the first major market to start trading in Asia Pacific, the S&P/ASX200 was down 0.3% in early trade.

"What investors have to expect coming into tomorrow and beyond is that we are going to be dealing with a lot of event risk," said Michael Purves, chief executive officer at Tallbacken Capital Advisors in New York.

"There are still going to lingering questions with other regional banks. Under such a such a scenario, it’s hard not to expect sustained very high rate volatility."

U.S. February inflation numbers are due out on Tuesday, followed by the UK's budget on Wednesday and the European Central Bank's interest-rate meeting on Thursday, adding to risk factors for markets.

"There's a rough ride ahead," said Pooja Kumra, senior European and UK rates strategist at TD Securities in London.

U.S. stock market volatility as measured by the "fear index," the VIX, had already shot up on Friday to its highest since October, while the ICE (NYSE:ICE) BofA Move Index, a measure of volatility in the U.S. fixed income market, rose to its highest since mid-December.

Stock markets in the Middle East ended lower on Sunday, with the Egyptian bourse leading the declines. In Qatar, almost all the shares were in negative territory, including Qatar Islamic Bank, which tumbled 3.9%.

In another sign of possible contagion to other assets, stablecoin USD Coin (USDC) lost its dollar peg and slumped to an all-time low on Saturday. It later recovered most of its losses after Circle, the firm behind it, assured investors it would honour the peg despite exposure to Silicon Valley Bank.

Still, unease about the banking sector is likely to linger.

Investors are going into Monday's trading day with little time to digest the latest developments. SVB could have a domino effect on other U.S. regional banks and beyond. U.S. regional and smaller bank shares were hit hard on Friday. The S&P 500 regional banks index dropped 4.3%, bringing its loss for the week to 18%, its worst week since 2009.

POTENTIAL HIT Britain's government on Sunday was scrambling to minimize the damage on the country's tech sector. Prime Minister Rishi Sunak said the British government was working to find a solution to limit the potential hit to companies resulting from the failure of SVB's UK subsidiary.

Advisory firm Rothschild & Co is exploring options for the subsidiary, as insolvency looms, two people familiar with the discussions told Reuters. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure. In Asia, the SVB failure has left many Chinese funds and tech start-ups in the lurch, as the bank was a key funding bridge for groups operating between China and the U.S, the Financial Times reported on Sunday. The Chinese joint venture of SVB said on Saturday it has a sound corporate structure and an independently operated balance sheet. Having ramped up expectations for further interest rate hikes in the United States and Europe, investors are contemplating whether turmoil in the banking sector could force central banks into a re-think.

Investors will be laser-focused on the ECB, which looks set to deliver another hefty interest rate hike on Thursday. A surprise surge in underlying inflation in February has left policymakers fretting that price pressures could prove persistent.

The ECB will be vigilant to the risks of possible contagion and will make sure liquidity is plentiful in the system, said Marchel Alexandrovich, European economist and partner of Saltmarsh Economics.

And if there is a difficult week in the markets, ECB President Christine Lagarde may "deliver a somewhat more cautious message," he said.

UK finance minister Jeremy Hunt's UK budget may be overshadowed by the SVB fallout in Britain. Hunt is expected to prioritise keeping public finances steady, resisting giveaways that could destabilise sterling, stocks or gilts.

But wide estimates for new public borrowing needs make the outlook for government bonds uncertain.