Early Morning Call: USD tanks after SVB collapse prompts US regulators, Fed to support banking system

Indices overview

US markets closed in the red on Friday, as markets got increasingly worried by a Silicon Valley Bank (SVB) collapse. Wall Street and the US 500 closed lower, 1.07% and 1.45% respectively, while the Nasdaq lost 1.76%.

To avoid further losses, a series of measures was announced by the US administration ahead of the Asia trading session which gave a bit of fresh air to the markets.

In the APAC region, Hong Kong's tech-heavy Hang Seng led gains this morning. In Japan the Nikkei initially reacted positively too but the rise of the safe-haven yen translated mechanically into a loss in the Japanese index.

These US measures also boosted the US futures, and Europe indices open higher. All SVB depositors will have access to all money on Monday. On Friday alone, depositors tried to withdraw a total of $42 billion.

Additional support will be provided to the banking system. US regulators guaranteed that access to emergency funds will be made easier to banks. This was backed by the US Federal Reserve (Fed) who said it will facilitate borrowing. And to show how seriously the US authorities are taking the SVB collapse, US president Joe Biden made a point to reassure the market himself: "The American people and American businesses can have confidence that their bank deposits will be there when they need them" adding that government is "firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again."

To avoid the spread to other financial institutions, regulators took the decision to close another bank, Signature Bank, which on Friday alone lost 22% of it already dwindling value. Like SVB, Signature Bank clientele were essentially linked to the tech sector. Almost a quarter of bank deposits came from the Crypto sector.

The US dollar, already weakened by Friday's non-farm payrolls (NFP) report, lost more ground on the US regulators, while gold rose to a one-month high.

The SVB collapse also means that markets now are speculating on the Fed rate policy, some investors thinking that a rate hike later this month is no longer a certainty. Before the SVB collapse, Fed funds futures implied a 50-basis point (bp) hike at the next Federal Open Market Committee (FOMC) meeting on 22 March. Now this scenario had been priced out, and 14% reckon Fed chair, Jerome Powell will keep rates unchanged.

Central banks

Before the FOMC meeting next week, other central banks will be in the limelight in the coming days. On Wednesday, the Bank of Japan (BoJ) will release its meeting minutes, followed on Thursday by the European Central Bank (ECB) interest rate decision. The main refinancing rate is expected to rise by 50-basis points to 3.5%. A 50 bp hike is also expected for deposit facility and marginal lending rates, to 3% and 3.75% respectively.

In the UK, HSBC said it has acquired Silicon Valley Bank UK for one pound. UK Chancellor Jeremy Hunt said the government and the Bank of England (BoE) had facilitated a private sale of the UK arm of Silicon Valley Bank to HSBC. The move will protect deposits without taxpayer support. SVB customers will be able to access their deposits and banking services as normal from today.

The Bank of England added that no other UK banks are materially affected, and the wider UK banking system remains safe, sound and well capitalised.

Equities

Elsewhere on the UK equity market, watch out for Direct Line Insurance. The group reported adjusted gross written premium down 3.2% to £2.97bn, while operating profit tumbled 94.6% to £32 million.

Direct Line Insurance attributes this performance to extremely bad weather, a difficult investment market, and challenging home and motor markets.