LONDON (Reuters) – Markets have been on a bumpy ride this week as the fallout from the collapse of startup-focused Silicon Valley bank, the biggest US bank failure since the 2008 financial crisis, coincided with key economic data and policy meetings.
US inflation figures for February are due on Tuesday, followed by the UK’s budget on Wednesday and the European Central Bank’s interest rate meeting on Thursday.
“There is a difficult road ahead,” said Pooja Kumra, chief European and UK price analyst at TD Securities in London.
US stock market volatility as measured by the “fear index,” the VIX (.VIX), actually rose on Friday to its highest level since October, while the ICE BofA Move Index (.MOVE), a measure of volatility in the US fixed-income market, It rose to its highest level since mid-December.
Stock markets in the Middle East closed lower on Sunday, with the Egyptian Stock Exchange leading declines. In Qatar, almost all stocks were in the negative territory, including Qatar Islamic Bank (QISB.QA), which fell 3.9%.
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In another sign of potential contagion for other assets, the stablecoin USDC (USDC) lost its peg to the dollar and fell to an all-time low on Saturday. It later recovered most of its losses after Circle, the company behind it, assured investors it would honor the currency peg despite its exposure to Silicon Valley bank.
However, concern about the banking sector is likely to continue.
US Treasury Secretary Janet Yellen said on Sunday that she is working with regulators to respond to the SVB’s implosion.
The Washington Post reported on Sunday, citing three people familiar with the matter, that US authorities are considering protecting all uninsured deposits at a Silicon Valley bank, and are considering intervening to prevent what it fears will be a panic in the US financial system.
But investors can get into the trading day on Monday with little time to digest the latest developments.
SVB could have a domino effect on other US regional banks and beyond. Shares of regional and smaller US banks were hit hard on Friday. The S&P 500 Regional Banking Index (.SPLRCBNKS) fell 4.3%, bringing its loss for the week to 18%, its worst week since 2009.
“Investors hate uncertainty and surprises, and this was a surprise that created more uncertainty,” said Michael Farr, CEO of investment advisory firm Farr, Miller & Washington in Washington, D.C. On Monday, Wall Street may see some volatility.
On Sunday, the British government struggled to minimize damage to the country’s technology sector. Prime Minister Rishi Sunak said the UK government was working on a solution to limit the potential hit to businesses resulting from the failure of the UK subsidiary of SVB.
Two people familiar with the discussions told Reuters that advisory firm Rothschild & Co is examining options for the subsidiary as bankruptcy looms. The Bank of England said it was seeking a court order to put the UK arm into bankruptcy proceedings.
The failure of SVB in Asia has left many Chinese startup funds and tech companies in a bind, the Financial Times reported Sunday, with the bank serving as a key funding bridge for groups operating between China and the United States.
The Chinese joint venture told SVB on Saturday that it has a sound corporate structure and balance sheet that operates independently.
After expectations of higher interest rates in the United States and Europe increased, investors are pondering whether the turmoil in the banking sector could force central banks to rethink.
Investors will laser focus on the European Central Bank which looks set to raise interest rates again on Thursday. A sudden spike in core inflation in February has policymakers worried that price pressures may prove persistent.
Marcel Alexandrovich, European economist and partner at Saltmarch Economics, said the ECB will be vigilant about potential contagion risks and will ensure there is ample liquidity in the system.
He said that if there is a difficult week in the markets, “European Central Bank President Christine Lagarde may send a somewhat more cautious message”.
The fallout from Britain’s SVB could overwhelm UK Finance Minister Jeremy Hunt’s budget. Hunt is expected to prioritize maintaining public finances stability, resisting flashes that could destabilize the pound, stocks or gold bonds.
But broad estimates of new public borrowing needs make the outlook for government bonds uncertain.
Coverage by Dara Ranasinghe in London. Additional reporting by Ira Iosbashvili in New York. Editing by Elisa Martinuzzi, David Holmes and Diane Kraft
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