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STOXX 600 up 0.6%
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Sentiment fragile on SVB jitters
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Eyes on U.S. inflation data
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Wall Street futures rise
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IS IT "PROFIT O'CLOCK" FOR EUROPE'S BANKS? (1214 GMT)
The collapse of SVB has served an unpleasant reminder for Europe's banks of what can happen when interest rates rise, especially for smaller lenders that might have a high concentration of customers in a niche market - as was the case with SVB.
Analysts widely agree the dynamics of the European banking sector are very different and SVB is unlikely to create the kind of systemic risk that brought down so many institutions in 2008. However, there is one element that is hard to overlook - the tremendous outperformance of Europe's banks.
The STOXX banking index hit a record low in late September 2020. At the end of February, it had more than doubled in value, compared with a gain of 70% in the S&P banking index and 5% in an index of major Chinese lenders . Even with the sell-off the last few days, European banks are still 88% above those record lows, compared with a 35% gain in U.S. banks and a 1% loss in Chinese banks.
“The European banks have had a great run and outperformed the US banks by 50% over the last six months," Ciaran Callaghan, head of European equity research at Amundi, said on Friday, the first day of the selloff.
European banks run very differently. When they buy bonds, they hedge the interest-rate exposure, which insulates them a bit more to rate rises and makes fixed income fire-sales far less likely, he said.
"When you have these events in the market, it spooks investors, but from my perspective I believe this will die down, will blow over for European banks, and when the dust settles, it will be a buying opportunity," Callaghan added.
AS CRYPTO-FRIENDLY BANKS COLLAPSE, WHERE ARE CRYPTO FIRMS GOING? (1200 GMT)
As U.S. banks Silvergate and SVB collapsed, it looks that crypto companies have been prompted to abandon traditional finance and move into decentralised finance (DeFi).
Brokerage Needham says with fewer available "crypto friendly" banks, DeFi and on-chain apps have become the preferred destination for the crypto firms.
Also, Binance said it will convert the remaining of the $1 billion industry recovery initiative funds from BUSD stablecoin to native crypto, including Bitcoin, Ether and Binance Coin.
As a result, cryptocurrencies have rallied over the last 24 hours, with a flight to crypto assets less reliant on the banking system, aiding the climb.
(Aniruddha Ghosh)
THE TOUGH CALL FOR THE ECB (1021 GMT)
Financial markets have scaled back their expectations for European Central Bank monetary policy just days before a crucial meeting, as they weigh up the contagion risks from the collapse of three U.S. banks in under a week.
"Downsizing to 25 bps may seem prudent amidst the uncertainty, but could also be seen as an acknowledgement of a problem," Citi analysts say in a research note.
"A 50-bp hike still seems most likely in our view, but we also think the ECB is now far less likely to be able to offer much guidance for May and beyond," they add.
"A 25 bps rate hike instead of the expected 50 bps might trigger further concerns about the potential impact of the SVB's collapse and more volatility," says Massimiliano Maxia, a senior fixed-income specialist at Allianz Global Investors.
Markets are almost evenly divided on the odds of 25 and a 50-bp rate hike, and the ECB ESTR forward for March is currently at 2.77%, implying a depo rate at 2.87%, which means a 52% chance of 50 bps and 48% chance of 25 bps.
Expectations for the terminal rate have dropped by around 75 bps in just a few days.
According to Citi analysts, the recent repricing "implies policy transmission is now biting so hard that we think central banks may have to call off the inflation fight."
"Regardless of the consensus that SVB's failure is unlikely to trigger a systemic crisis, markets and policymakers are already scrutinizing where the next blow could come from," says Michael Leister, head of interest rates strategy at Commerzbank.
"More important for now, it reinforces market expectations that the days of aggressive hikes are numbered," he adds.
(Stefano Rebaudo)
STOXX STEADIES, VOLATILITY DIPS, BANKS STRUGGLE (0916 GMT)
After selling off for two wild days it looks European shares are finally managing to find some footing with a gauge of euro zone volatility dipping after scoring its biggest two-day jump in 9 months on Monday.
Real estate and utilities that tend to benefit from falling rates are top gainers, as markets reprice the outlook for rate hikes in the U.S., while battered banks briefly eked out a small gain before falling back again.
All in all, the pan-European STOXX 600 equity benchmark index was last little changed after earlier rising as much as 0.4%. Here's your opening snapshot:
EUROPE EYES TENTATIVE STABILISATION AFTER TWO-DAY ROUT (0731 GMT)
European index futures wavered around parity before the cash market open, pointing to a tentative stabilisation following a two-day rout that erased part of this year's rally for the STOXX 600 and wiped off almost 100 billion euros in market cap from the region's bank index.
EuroSTOXX50 and FTSE futures were both last around 0.2%, while S&P 500 contracts inched up 0.3%. U.S. regional bank First Republic Bank's Frankfurt-listed shares rose more than 20% in thin early morning trading.
Needless to say, that sentiment remained fragile as investors continue to assess the broader implications from the collapse of Silicon Valley Bank and Signature Bank (SVB ) that prompted the U.S. government to take steps to shore up systemic confidence.
Eyes later in the day will be on U.S. inflation data coming just as markets are undergoing a massive repricing of the interest rate outlook in the world's biggest economy.
Turning to European corporate news, banks remain in sharp focus. Credit Suisse said customer "outflows stabilized to much lower levels but had not yet reversed. HSBC was seen falling another 2% on news it would inject 2 billion pounds of liquidity into the UK unit of SVB.
Shoemaker Tod's, insurer Generali and airport operator Flughafen Zurich were all seen rising following their latest earnings reports. Banking company Close Brothers and chemicals maker Wacker Chemie were instead called lower following results.
(Danilo Masoni)
READY OR NOT! HERE COMES US INFLATION DATA (0650 GMT)
Investors are struggling to find their risk appetite this week, with markets jittery in the wake of the stunning collapse of Silicon Valley Bank and measures by U.S. authorities to stem contagion risks.
And yet, global banking stocks have been brutally hit, with Japanese banks sinking to their lowest in nearly three months on Tuesday. The dollar remains pinned near a one-month low, while oil prices fell more than $1 and MSCI ex-Japan index languishing at more than two month lows. And while the two-year U.S. Treasury yield was up 16 basis points at 4.109% on Tuesday, it remained far off last week's high of 5.085%.
All of that means that the market is ready to believe the Fed may just stay pat and not hike next week, with peak rates not far off. Traders are even pricing in rate cuts by the end of the year, a far cry from expectations last week of interest rates staying above 5% through 2023.
The tentativeness might not pass through to Europe, though, as futures indicate stocks might be in for a higher open. Whether they sustain any gains remains to be seen. Investors will be keen to see if the worst is over for European banking stocks, with eyes on the STOXX banking index, which clocked its biggest one-day percentage drop in a year on Monday.
The spotlight will be firmly on U.S. inflation data for February, due later in the day, when consumer prices are seen to have risen at a solid pace, but economists are divided on whether the data will be enough to push the Fed Reserve to hike rates again next week.
Key developments that could influence markets on Tuesday:
Economic events: CPI data from Netherlands, Finland, Spain and the United States
(Ankur Banerjee)
