Asian equities were set for a weak start Friday after a rout in regional banks rattled Wall Street, with brewing anxiety about the next financial shoe to drop making traders increase their bets on Federal Reserve rate cuts.
(Bloomberg) — Asian equities were set for a weak start Friday after a rout in regional banks rattled Wall Street, with brewing anxiety about the next financial shoe to drop making traders increase their bets on Federal Reserve rate cuts.
US futures rose slightly in early Asia trading after the S&P 500 tumbled 0.7% on Thursday. Contracts for Australia dropped, while those for Hong Kong were little changed. Japanese markets are shut for a holiday.
Another unsettling round of trading halts in the financial industry hit US lenders including Western Alliance Bancorp, PacWest Bancorp and First Horizon Corp., while a probe into Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s deal also weighed on sentiment — fueling a fourth straight daily decline in the S&P 500. The deepening rout sparked a search for safety, boosting the yen and gold.
Apple Inc. rose in late hours after reporting earnings. Nevertheless, Wall Street’s fear gauge, the Cboe Volatility Index (VIX), spiked to hit the key 20 mark. That’s a stark contrast with the calm that prevailed in markets for the most part in April and saw the measure dropping below 16 just last week.
Investor confidence remains fragile after a string of bank failures and despite Fed Chair Jerome Powell’s assurance Wednesday that authorities were closer to containing the crisis. Smaller lenders are under pressure after a year of rate hikes hammered the value of their bond holdings and drove unrealized losses to an estimated $1.84 trillion.
“The acute phase of bank turmoil may not be over, and policymakers need urgently to recognize that,” said Krishna Guha, vice chairman at Evercore ISI. “The problem is that their financial stability policy options are limited.”
The recent collapse of First Republic Bank and a raging selloff in regional banks has also bolstered fears of a lending crunch that could spur a hard landing. For firms with shakier finances that often borrow money not only through banks but also with high-yield debt, signs of stress in the system may inflict even more pain.
That’s a tricky scenario for a central bank that just raised rates to the highest level since 2007, signaled a potential pause as early as June, but refrained from hinting at a pivot at this stage.
Bond traders eyeing the deepening rout in US regional bank shares concluded the Fed is likely to reverse this week’s quarter-point interest-rate increase by July in response to tightening credit conditions.
Swap contracts linked to Fed meeting dates collapsed, with the July rate briefly falling to 4.82%, a quarter point below the 5.08% level where the effective fed funds rate is likely to settle as a result of Wednesday’s increase in the target band to 5%-5.25%. The June swap rate at lows around 5% reflected one-in-four odds of a cut as soon as June.
Jobs Report
Traders are also gearing up for Friday’s key jobs report, following data that showed applications for US unemployment benefits rose by the most in six weeks while continuing claims fell. Even as the labor market starts showing some weakness, it’s still cooling at a much slower pace than other economic indicators in the wake of an aggressive tightening campaign by the Fed.
“In our view, the Fed is very unlikely to cut unless there’s severe financial stress and/or a recession is imminent — stocks likely go down in both scenarios,” said Chris Senyek at Wolfe Research.
Meantime, fears about a political standoff over the US debt limit are driving up rates on short-term Treasury bills, pushing them over 10-year yields by the most in at least three decades.
The risk that Congress will fail to act drove 3-month Treasury bill yields to over 5.25%, with them hitting as much as about 2 full percentage points over 10-year yields on Thursday. That’s the most since the data compiled by Bloomberg began in 1992.
In other markets, oil was little changed at the start of trading in Asia after repeated signs of dwindling demand spurred a crash in the commodity that has seen it lose more than 10% this week. Gold held gains of around 3% this week.
Some of the main moves in markets:
Stocks
- S&P 500 futures rose 0.2% as of 7:23 a.m. Tokyo time. The S&P 500 fell 0.7%
- Nasdaq 100 futures rose 0.2%. The Nasdaq 100 fell 0.4%
- Hang Seng futures were little changed
- S&P/ASX 200 futures fell 0.4%
Currencies
- The Bloomberg Dollar Spot Index fell 0.1%
- The Japanese yen was little changed at 134.31 per dollar
- The offshore yuan was little changed at 6.9183 per dollar
- The Australian dollar was little changed at $0.6694
Cryptocurrencies
- Bitcoin fell 0.4% to $28,775.30
- Ether was down 0.3% at $1,871.82
Bonds
- The yield on 10-year Treasuries advanced four basis points to 3.38%
Commodities
- West Texas Intermediate crude rose 0.3% to $68.77 a barrel
- Spot gold was little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rita Nazareth.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.