Markets set for aftershocks of Silicon Valley Bank collapse

US authorities are considering safeguarding all uninsured deposits at Silicon Valley Bank, weighing an intervention to prevent what they fear would be a panic in the US financial system, the Washington Post reported on Sunday, citing three people with knowledge of the matter.

But investors could be going into Monday’s trading day with little time to digest the latest developments.

SVB could have a domino effect on other US regional banks and beyond. US 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.

“Investors hate uncertainty and surprises, and this was a surprise that has created even more uncertainty,” said Michael Farr, CEO  of investment advisory firm Farr, Miller & Washington in Washington, DC “If there’s no news or no buyout between now and Monday, Wall St may be in for some volatility.”

Rishi Sunak

Britain’s government on Sunday was scrambling to minimise 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 said. The Bank of England 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 US, 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 US and Europe, investors are contemplating whether turmoil in the banking sector could force central banks into a rethink.

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.

Reuters