Daily Market Diary

The Fed's US Bank Rescue Impacts Markets.

Silicon Valley Bank's failure and the government's rescue of its depositors are shaking market bets on the economy and US interest rates.

Authorities pledged to fully protect depositors' money and offer banks one-year loans on more favorable terms to calm concerns about the US financial system. Market participants expect short-term sentiment boosts but long-term moral hazard. Investors and strategists say:

Uplifting

TD Securities global interest rates strategy head Priya Misra

“Bank liquidity and capital concerns will remain even if SVB is sold. Bank liquidity from the new BTFP program should boost sentiment. . Despite high inflation, we remain long 10s. We expect a 25bp Fed hike in March and 5.75% terminal rate.”

Immorality

Rabobank strategists Michael Every and Ben Picton

If the Fed is now backing anyone facing asset/rates pain, they are de facto allowing a massive easing of financial conditions and rising moral hazard. ц

Uncertainty

Capital Economics North America chief economist Paul Ashworth

“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen instantly in the digital age. However, contagion has always been about irrational fear, so we cannot guarantee success.”

pause

Goldman Sachs' Jan Hatzius and team

In light of recent banking system stress, we no longer expect the FOMC to raise rates at its Mar. 22 meeting with considerable uncertainty about the path beyond March.

Assistance

UBS analyst Erika Najarian

US bank stocks may experience a sharp relief rally. “Our clients may continue to prefer flight to quality, which are ironically the Too Big Too Fail But Now Have Been Regulated Into Having Tons of Liquidity and Capital Banks'”—JPMorgan, Bank of America, and Wells Fargo.

Dollar Stress

ANZ Bank strategist John Bromhead

“The policy response should calm the system. Policymakers ring-fenced the risk and avoided a systematic event, similar to the UK pension crisis in September or October. Risk-sensitive currencies are rebounding, which is dollar-negative. Even if financial system concerns subside, USD pressure may persist.”