Policymakers Move to Limit SVB Impact Buoys Stocks and Bonds

Talking Points:

• The US banking sector remains key focus for investors following announcement of support measures.

• Soft economic data could intensify bets that the RBA will pause its hiking cycle at its next monetary policy meeting.

The major concerns facing investors over the weekend and into a fresh week of trade were two-fold: how would the collapse of Silicon Valley Bank on Friday impact the wider financial markets and would policymakers move to prevent a complete loss of faith in the US banking system. The latter issue was answered swiftly yesterday with the Federal Reserve, US Treasury, and Federal Deposit Insurance Corporation (FDIC) announcing two key measures. The first, and most important, measure is that all uninsured depositors of SVB would be made whole. Prior to this announcement depositors were only assumed up to an amount of $250,000. The second measure introduced was the announcement of a new liquidity programme named the Bank Term Funding Program (BTFP). This facility will enable financial institutions to access liquidity by using US Treasures and other securities as collateral to prevent the forced selling of hold-to-maturity securities that led to SVB realising huge losses on its portfolio.

US 10-Year Treasury Yields Tank as Investors Seek Safety

The market reaction to the measures was initially positive, with major US equity indices rallying strongly in pre-market trading. However, this optimism evaporated rather quickly, with investors moving out of risk assets and seeking the safety of US Treasuries. Indeed, the yield on 10-year tenors has fallen devilishly close to 3.5% and looks set to push through this zone in the short-term if investors continue to bet on a pivot from the Federal Reserve at its upcoming meeting. Prior to this SVB debacle the market had priced in a 50% chance 50-basis point hike from the US central bank at its next meeting as a near certainty. This is no longer the case, with market pricing now suggesting that a smaller 25-basis point move is the more likely outcome. This could take some sting out of the tail of the US Dollar in the short-term against its major peers, in particular the Euro as the ECB readies yet another aggressive rate hike on Thursday. President Christine Lagarde and her colleagues at the European Central Bank are expected to follow through with pre-announced plans of a half-point hike to the deposit rate on Thursday, as they continue to attempt to tame a core inflation rate that pushed to fresh record highs just last month.

Economic Calendar

Locally, the Westpac Consumer Confidence index should provide investors with some insight into the health of the Australian consumer and could lead to some repricing of the RBA’s hiking trajectory. Governor Phillip Lowe reaffirmed recently that at least one more increase to the OCR will be necessary to tame elevated consumer price growth. However, the Governor also told reporters at the AFR Business Summit last week that a pause in rate rises is not too far away and will be completely dependent on upcoming data. Therefore, if consumer and business confidence figures come in under expectations, market participants may begin to price in a pause to the rate hiking cycle. Ultimately, this would be positive for the local stock market and serve as a severe headwind for the Australian Dollar.

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