Bailouts are back. Tech bros and crypto firms breathe a sigh of relief as the Feds step in to guarantee all of the deposits at Silicon Valley Bank and Signature Bank, as well as setting up a new liquidity program to stop contagion to the wider banking sector. That hasn't stopped other west coast banks in particular from selling off in premarket, however. The dollar plunges as markets bet that the Federal Reserve will be too scared of causing a crash to raise interest rates in March. Bond yields fall as the flight to safety outweighs any fear of future inflation. Crypto soars accordingly. And Pfizer is set to buy Seagen for $43 billion. Here's what you need to know in financial markets on Monday, 13th March.
1. Feds bail out tech bros
Federal authorities bailed out depositors in Silicon Valley Bank (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY), aiming to head off a run on the country’s second-tier regional banks. The Federal Reserve, Federal Deposit Insurance Corporation and the Treasury said they will make sure the two banks honor all of their deposits, the vast majority of which are above the $250,000 federally-insured threshold. They also set up a new instrument, named the Bank Term Funding Plan (BTFP), which will allow banks to sell Treasury bonds and other high-quality liquid assets to the Fed at par if they need to raise liquidity. The program will be back-stopped by $25B of taxpayers’ money. The move means that the banks’ clients, many of them venture capitalists and crypto platforms, will not have to carry the can for what appears to have been startlingly elementary risk management failures at the two banks.
2. Banking stocks still falling despite rate freeze bets
The signs of panic at incipient financial instability caused a sharp and abrupt reassessment of the outlook for interest rates. Goldman Sachs and others said they now expect the Fed to keep rates unchanged at its meeting in March, in contrast to the consensus for a 25 basis point hike before last week’s events. The dollar fell and risk assets were broadly supported, after having fallen out of bed with a bump on Friday. However, if the Fed and the Treasury thought they had drawn a line under the fiasco, they were much mistaken. Shares in First Republic Bank (NYSE:FRC), fell 60% in premarket trade, amid bets that it will be the next domino to fall, while PacWest Bancorp (NASDAQ:PACW) stock fell 40% and Western Alliance (NYSE:WAL) fell 45%. Banks with high concentrations of flighty corporate deposits are seen as being most at risk from concerns about liquidity, while those with more staid retail deposit bases are seen as better insulated.
3. Stocks set to open mixed; Pfizer seen close to sealing Seagen deal
Stocks more broadly were struggling to make headway in premarket trade, with many still unsettled by the federal rescue of institutions that were largely unknown outside their respective niches until last week. By 06:30 ET (10:30 GMT), Dow Jones futures were down 34 points, or 0.1%, while S&P 500 futures were up 0.2% and Nasdaq 100 futures were up a more solid 0.6%. All three main cash indices had lost between 1% and 1.8% on Friday. European markets were more rattled, with the main benchmark indices losing over 2% each in early trading. While the focus is likely to stay on the banking sector later (HSBC (LON:HSBA) was down 4.3% after snapping up SVB’s U.K. operations for a nominal £1), other stocks in the news include Pfizer (NYSE:PFE), which finally agreed to buy Seagen (NASDAQ:SGEN) for $43B, and Novartis (NYSE:NVS), which outperformed after announcing a big new buyback program. A rumored deal to sell Qualtrics (NASDAQ:XM) to Silver Lake for $12.5B couldn’t stop SAP (ETR:SAPG) from falling nearly 3%. Boeing (NYSE:BA) is bucking the trend on hopes for a large order from Saudi Arabia.
4. Crypto breathes a sigh of relief
One asset class with an unambiguously positive reaction to the weekend’s developments was crypto. Some of the biggest depositors at the two banks that were rescued were Coinbase (NASDAQ:COIN) and USD Coin issuer Circle, both of whom stood to lose a large part of their reserves in the absence of a bailout. USD Coin – a stablecoin designed to trade at $1 – had fallen as low as 88c at the weekend, after Circle’s $3.3B exposure to Silicon Valley Bank (never a secret) became widely known. It had recovered to 98.60 by early Monday in New York, still trading at a clear discount to its notional value. Coinbase stock, meanwhile, was up 3.3% in premarket. Elsewhere, Bitcoin rose 8.5% to $22,229, while Ethereum rose 8.6% to $1,585, supported by perceptions that the Fed will be forced to stop its rate hikes.
5. Oil down on fears for the economy; OPEC+ output held up in February
Crude oil prices fell, with concerns about the longer-term implications of bank failures in the U.S. counting for more than the sharp drop in the dollar, which would generally support prices. By 06:45 ET, U.S. crude futures were down 1.3% at $75.64 a barrel, while Brent was down 1.2% at $81.76 a barrel. Argus Media estimated that the total output of the OPEC+ bloc had remained steady in February, despite pressure on Russia from tightened western sanctions.