S&P 500 gives back early strength, bond yields freefall, ASX 200 set to tumble

ASX 200 futures are trading 132 points lower, down -1.89% as of 8:30 am AEDT.

S&P 500 whipsaws back to red, the Fed steps in with a US$25 billion backstop to shield banks from massive losses, US bank stocks nosedive over fears of deposit flight, gold and bitcoin surge, US bond yields stage the biggest decline since October 1987 and rate hike expectations evaporate.

Let's dive in.

S&P 500 SESSION CHART

MARKETS

• S&P 500 fades from session highs of 1.1% as the SVB saga remains the biggest focus and driver of overnight volatility
• US says all SVB deposits safe, backstop shields banks from $300bn of losses (Bloomberg)
• Signature Bank becomes next casualty of banking turmoil (Bloomberg)
• SVB's failure exposes lurking systemic risk of tech's money machine (Bloomberg)
• Fed announces emergency lending facility to shore up financial system (FT)
• Markets reprice Fed rate-hike expectations amid banking stress (Reuters)

STOCKS

• Citi (-7.5%), Bank of America (-5.8%), Goldman Sachs (-3.7%) and other major US banks faced selling pressure after SVB’s closure
• Charles Schwab (-11.6%) shares sold off even after the bank reassured shareholders and customers that it isn’t seeing any significant outflows
• First Republic (-61.8%), Western Alliance (-47.1%) and other US regional banks tumble over fears of deposit flight (FT)

ECONOMY

• China's new premier Li Qiang says 5% growth target "no easy task" (Bloomberg)
• China's Jan-Feb economic data shows improvement (Bloomberg)
  
  

Deeper Dive

Fed vs. US Banks

SVB and Signature bank have both been run into the ground but all depositors are fully protected. The Fed announced a new facility with US$25 billion from the Emerging Services Foundation to backstop bank deposits. That caused US stocks to surge in the immediate aftermath - remember, investors hate uncertainty and any government intervention to stop uncertainty is great news.

The US 2-year Treasury yield nosedived 59 basis points to 4.0%, its largest one-day drop since October 1987. This was the day after the US 'Black Monday' crash.

The situation is still evolving but here are the latest takes on markets, banks and interest rates:

• On markets: "“It Isn’t Different This Time. We remain defensively oriented in anticipation of a retest of October’s lows in the coming weeks prior to ‘The Bottom’ marking the end of the Bear Market in 2023.” - Evercore
• On banks: Morgan Stanley says the SVB blowup will likely increase competition among banks. This could result in higher deposit rates, higher expenses as banks enhance their customer experience, lower fees and "more pressure on MIN and EPS in 2023-24."
• A pause: "In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March." - Goldman Sachs
• Another pause view: Ed Hyman of Evercore ISI also argues for a pause as: Massive tightening has already occurred, a financial shock has developed and inflation is slowing. Although he argues that the case for a pivot is not strong but the case for a pause is because of the SVB and Signature collapse
• On peak fed funds: Market expectations for peak Fed funds rate has nosedived in the last two days from a peak of almost 5.7% last week to 5.3% last Friday. (Chart below) The market has realised the Fed has broken something and terminal rate expectations are beginning to plummet
• Food for thought: The Fed kind of has two options here. It can either hike interest rates and continue to tighten amid (and potentially exacerbate) a deposit flight OR cut interest rates and add liquidity into the system while inflation is running at more than three times its target. What a tough call. Will they continue to try and 'get the job done' or does SVB mark the tipping point of a larger blowup/recession?

Australian corporate exposure to SVB

The Livewire team is in the process of working out what this collapse means for Australian investors. But some locally-listed companies are already telling the market what exposures they had to the SVB saga.

• Life360 (ASX: 360), Dubber (ASX: DUB), and SiteMinder (ASX: SDM) both have deposits with SVB
• Xero, Janus Henderson, Sezzle, Virgin Money all had partnerships or shared board members with SVB in the past
• Although unlisted, Australian-founded Canva also apparently has a banking relationship with SVB, according to the AFR

Sectors to Watch

The market has just upped the ante for volatility. At this point in the game, we're kind of at the mercy of more weakness but who know's what'll happen next. Does the market nosedive? Does it bounce from this oversold state?

In terms of sectors to watch:

• Real Estate, Utilities, Healthcare and Tech: These sectors managed to bounce 0.5% to 1.6% overnight, led by the yield-sensitive real estate sector
• Gold: The yellow metal has been on an absolute tear over the last three days, up 5.5% to US$1,912 as yields, stocks and the US dollar falters. Is it time for gold bulls to pop the champagne? You can check out our gold page, which includes all ASX-listed gold stocks here

Add US CPI to the mix

US inflation data is due tonight, which will be another major catalyst. Inflation is still too hot but a cooler-than-expected reading could further fuel this evolving pause narrative.

• US inflation was 6.4% in January and core inflation was 5.6%
• Expectations are for these to fall to 6.0% and 5.5% respectively
• Cleveland Fed Inflation Nowcast expects these to fall to 5.37% and 5.66% respectively

Interesting stuff

SVB perspective: There hasn't been a bank failure for more than 800 days. They're not that uncommon but the size of SVB's is the second largest blowup since 2000.