Bonds Surge, Nasdaq Futures Gain as Rate Bets Ease: Markets Wrap

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The Nasdaq futures, which are sensitive to changes in interest rates, rose by just under 1%, while the S&P 500 futures steadied after erasing earlier gains due to a sell-off in banking stocks. European stocks also saw a decline of almost 3%, but managed to recover slightly to trade about 1.7% lower.

The yield on US Treasury two-year bonds fell by 33 basis points to 4.26%, marking the largest three-day decline since the stock market crash of October 1987. The yield on 10-year bonds also dropped to a one-month low, and the US dollar continued to decline against major currencies. The yield on German two-year bonds plummeted by 38 basis points to 2.72%, setting a record for the largest two-day fall.

The market upheaval caused by the collapse of SVB (presumably a financial institution) has led to a quick reassessment of where the Federal Reserve will take monetary policy. Swaps traders now believe there is only a 63% chance that the central bank will raise interest rates at its next meeting. Economists at Goldman Sachs Group Inc. predict that there will be no change in the policy rate following the SVB collapse. Prior to this event, there had been expectations of a possible rate hike of up to 50 basis points after Chair Jerome Powell's remarks to lawmakers on Tuesday.

Marija Veitmane, a senior multi-asset strategist at State Street Global Markets, stated that the collapse of SVB has shifted the Federal Reserve's focus to financial stability. She added that the Fed faces a difficult dilemma, as it needs to continue raising interest rates to curb inflation, while also safeguarding the financial system. This puts the Fed and the market in a lose-lose situation.

As concerns over the banking sector's health grew, shares of First Republic Bank plummeted by up to 60% in premarket trading, reflecting increasing fears about the state of regional banks in the US. These declines persisted despite the bank's announcement that it had over $70 billion in unused liquidity from the Federal Reserve and other lenders. In Europe, Commerzbank AG and Credit Suisse Group AG saw drops of more than 10%, while HSBC Holdings Plc fell over 2% after acquiring SVB's UK unit for £1.

US Treasury Secretary Janet Yellen assured that her office would protect all depositors at SVB. The government plans also include a new lending program, which the Fed officials stated would be large enough to protect uninsured deposits in the wider US banking sector. However, the sudden closure of New York's Signature Bank by state regulators on Sunday highlighted the urgency of stabilizing the financial system.

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Monday's market movements followed a week of significant losses for risk assets, with the US stock benchmark experiencing its worst week since September. The Cboe Volatility Index, also known as the "fear gauge" of Wall Street, surged to its highest level this year, indicating increased anxiety. Additionally, there is heightened anticipation for this week's consumer price index report.

Carol Pepper of Pepper International spoke on Bloomberg Television, stating that the Federal Reserve needs to carefully assess additional risks, which could take some time. She hopes that this situation will provide the Fed with a compelling reason to pause, as their primary responsibility is to establish financial stability.

In other market news, oil prices fell while gold prices rose due to its reputation as a safe haven asset.

Here are the main market movements:

Stocks:

• As of 7:32 a.m. New York time, S&P 500 futures rose by 0.2%
• Nasdaq 100 futures rose by 0.9%
• Futures on the Dow Jones Industrial Average remained unchanged
• The Stoxx Europe 600 fell by 2%
• The MSCI World index fell by 0.4%

Currencies:

• The Bloomberg Dollar Spot Index fell by 0.4%
• The euro rose by 0.2% to $1.0668
• The British pound rose by 0.3% to $1.2065
• The Japanese yen rose by 1.3% to 133.34 per dollar

Cryptocurrencies:

• Bitcoin rose by 3% to $22,134.04
• Ether rose by 1.7% to $1,583.9

Bonds:

• The yield on 10-year Treasuries declined by 16 basis points to 3.54%
• Germany’s 10-year yield declined by 24 basis points to 2.27%
• Britain’s 10-year yield declined by 18 basis points to 3.46%

Commodities:

• West Texas Intermediate crude fell by 1.7% to $75.36 a barrel
• Gold futures rose by 1.2% to $1,889 an ounce.

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