World markets set for aftershocks as SVB collapse ripples out

Markets were set for a bumpy ride this week as the fallout from collapsed startup-focused lender Silicon Valley Bank (SVB), the biggest US bank failure since the 2008 financial crisis, coincides with key economic data and policy meetings.

US February inflation numbers are due out on Tuesday, followed by the UK's budget on Wednesday and the European Central Bank's interest-rate meeting on Thursday.

"There's a rough ride ahead," said Pooja Kumra, senior European and UK rates strategist at TD Securities in London.

US stock market volatility as measured by the "fear index," the VIX, had already shot up on Friday to its highest since October, while the ICE BofA Move Index, a measure of volatility in the US fixed income market, rose to its highest since mid-December.

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Stock markets in the Middle East ended lower on Sunday, with the Egyptian bourse leading the declines. In Qatar, almost all the shares were in negative territory, including Qatar Islamic Bank, which tumbled 3.9 per cent.

In another sign of possible contagion to other assets, stablecoin USD Coin (USDC) lost its dollar peg and slumped to an all-time low on Saturday. It later recovered most of its losses after Circle, the firm behind it, assured investors it would honour the peg despite exposure to Silicon Valley Bank.

Still, unease about the banking sector is likely to linger.

US Treasury Secretary Janet Yellen on Sunday said she was working with regulators to respond to the implosion of SVB.

US authorities are considering safeguarding all uninsured deposits at Silicon Valley Bank, weighing an intervention to prevent what they fear would be a panic in the US financial system, the Washington Post reported on Sunday, citing three people with knowledge of the matter.

But investors could be going into Monday's trading day with little time to digest the latest developments.

SVB could have a domino effect on other US regional banks and beyond. US regional and smaller bank shares were hit hard on Friday. The S&P 500 regional banks index dropped 4.3 per cent, bringing its loss for the week to 18 per cent, its worst week since 2009.

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"Investors hate uncertainty and surprises, and this was a surprise that has created even more uncertainty," said Michael Farr, chief executive of investment advisory firm Farr, Miller & Washington in Washington, DC. "If there’s no news or no buyout between now and Monday, Wall St may be in for some volatility."

Potential hit

Britain's government on Sunday was scrambling to minimize the damage on the country's tech sector. Prime Minister Rishi Sunak said the British government was working to find a solution to limit the potential hit to companies resulting from the failure of SVB's UK subsidiary.

Advisory firm Rothschild & Co is exploring options for the subsidiary, as insolvency looms, two people familiar with the discussions told Reuters. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure.

In Asia, the SVB failure has left many Chinese funds and tech start-ups in the lurch, as the bank was a key funding bridge for groups operating between China and the U.S, the Financial Times reported on Sunday.

The Chinese joint venture of SVB said on Saturday it has a sound corporate structure and an independently operated balance sheet.

Having ramped up expectations for further interest rate hikes in the United States and Europe, investors are contemplating whether turmoil in the banking sector could force central banks into a re-think.

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Investors will be laser-focused on the ECB which looks set to deliver another hefty interest rate hike on Thursday. A surprise surge in underlying inflation in February has left policymakers fretting that price pressures could prove persistent.

The ECB will be vigilant to the risks of possible contagion and will make sure liquidity is plentiful in the system, said Marchel Alexandrovich, European economist and partner of Saltmarsh Economics.

And if there is a difficult week in the markets, ECB President Christine Lagarde may "deliver a somewhat more cautious message," he said.

UK finance minister Jeremy Hunt's UK budget may be overshadowed by the SVB fallout in Britain. Hunt is expected to prioritise keeping public finances steady, resisting giveaways that could destabilise sterling, stocks or gilts.

But wide estimates for new public borrowing needs make the outlook for government bonds uncertain.