According to the International Monetary Fund (IMF), Silicon Valley Bank’s collapse is not causing a global shock. The US Federal Reserve may opt for a lower, quarter-percentage-point interest rate rise later this month or even pause its monetary policy tightening altogether. This has fuelled bets, sending Treasury yields down and providing some support to equities.
US stock markets opened higher after consumer prices rose in line with expectations. The S&P 500 saw its biggest one-day advance since early January, climbing 2.0%, as regional bank shares rebounded from two days of selling. After a historic rally on Monday, bond markets fell as investors anticipated that central banks would slow their monetary tightening plans.
Investors went bargain hunting after the sell-off sparked by Silicon Valley Bank’s collapse. Bruised US bank stocks regain some ground, with First Republic Bank shares gaining as much as 63%. The KBW Nasdaq Bank index rose 3.2%, and European bank stocks also steadied, with the European Stoxx banking index closing up 2.5% after dropping 6.7% on Monday.
The return to relative calm followed the biggest drop in Japan’s Topix Banks index earlier in the day as investors reacted to Wall Street’s sell-off on Monday. The bank index fell 7.4%, its worst day over three years, while the Topix declined 2.7%. The dollar index lost 0.1% in foreign exchange markets, while Brent crude, the international benchmark, fell 3.9% to just below $78 a barrel.
Consumer prices in the US rose 6% over the 12 months to February, meeting economists’ forecasts, according to inflation figures released on Tuesday. The dollar remained little changed against major peers. Following the inflation data, markets are pricing in a 75% chance of a quarter-point rise at the Federal Reserve’s meeting that ends on March 22, with a 25% probability of no change.
The two-year Treasury yield climbed after data showed inflation remained elevated in February. Swaps traders now expect the Fed to lift rates by a quarter percentage point, previously considered unlikely following Silicon Valley Bank’s collapse.
The latest inflation figures come after a series of data releases that pointed to a still-hot US economy. The three-day swoon in the bond market was the biggest in decades, and investors now bet that central banks will slow their monetary tightening plans.