US stock futures rally as Fed acts on banks

US stock futures rallied in Asian trade on Monday as authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB), while investors wagered a rate hike this month was no longer a certainty.

Most Asian share markets were modestly in the red led by financial stocks, while the dollar dipped as short-term Treasury yields extended their steep decline.

In a joint statement, the US Treasury and Federal Reserve announced a range of measures to stabilise the banking system and said depositors at SVB would have access to their deposits on Monday.

The Fed said it would make additional funding available through a new Bank Term Funding Program, which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

The moves came as authorities took possession of New York-based Signature Bank, the second bank failure in a matter of days.

Analysts noted that, importantly, the Fed would accept collateral at par rather than marking to market, allowing banks to borrow funds without having to sell assets at a loss.

"These are strong moves," said Paul Ashworth, head of North American economics at Capital Economics.

"Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age," he added. "But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work."

Investors reacted by sending US S&P 500 stock futures up 1.4 per cent, while Nasdaq futures rose 1.5 per cent. EUROSTOXX 50 futures and FTSE futures were both little changed with markets wary of more volatility.

MSCI's broadest index of Asia-Pacific shares outside Japan crept up 0.3 per cent as investors pondered the consequences for regional markets.

Japan's Nikkei fell 1.6 per cent in choppy trade, while South Korea lost 0.5 per cent.

Chinese blue chips added 0.1 per cent after Beijing surprised by keeping the head of the central bank and finance minister in their posts on Sunday, prioritising continuity as economic challenges loom at home and abroad.

New Headache for the Fed

Such was the concern about financial stability, that investors speculated the Fed would now be reluctant to rock the boat by hiking interest rates by a super-sized 50 basis points this month.

Fed fund futures surged in early trading to imply only a 17 per cent chance of a half-point hike, compared with around 70 per cent before the SVB news broke last week.

The peak for rates came all the way back to 5.14 per cent, from 5.69 per cent, last Wednesday, and markets were even pricing in rate cuts by the end of the year.

"In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22," wrote analysts at Goldman Sachs.

"We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June, and July and now expect a 5.25-5.5 per cent terminal rate, though we see considerable uncertainty about the path."

Such talk, combined with the shift to safety, saw yields on two-year Treasuries fall a further 12 basis points to 4.46 per cent, a world away from last week's 5.08 per cent peak.

Longer-dated yields, however, climbed and the curve steepened as inflation remained a clear concern.

Much will depend on what US consumer price figures reveal on Tuesday, with an obvious risk that a high reading will pile pressure on the Fed to hike aggressively even with the financial system under strain.

The European Central Bank meets on Thursday and is still widely expected to lift its rates by 50 basis points and to flag more tightening ahead, though it will now have to take financial stability into account.

In currency markets, the dollar dipped 0.6 per cent on the safe-haven Japanese yen to 134.20, though that was off its early low.

The dollar eased 0.4 per cent on the Swiss franc, while the euro firmed 0.5 per cent to $1.0696 as short-term US yields dropped.

Gold climbed 0.6 per cent to $1,879 an ounce, having jumped 2 per cent on Friday.

Oil prices edged lower, with Brent down 24 cents at $82.54 a barrel, while US crude fell 14 cents to $76.54 per barrel.