Markets swing wildly as bank rescues fail to bring calm

Analysts expect that shares in European banks will bounce back

The headquarters of the European Central Bank. Photo: Andreas Rentz/Getty Images

Jon Ihle

March 15 2023 02:30 AM

Bank stocks and bond yields whipsawed back and forth yesterday as investors tried to make sense of market volatility following the collapse and rescue of Silicon Valley Bank (SVB).

Irish 10-year bond yields traded as low as 2.69pc in the morning before snapping back to close at 2.92pc by the end of the day – still below yields of 3.13pc on comparable bonds issued only last Thursday.

Shares in the domestic banks rallied after two days of heavy selling sent them plunging over fears of financial contagion.

AIB rose 4.85pc, Bank of Ireland was up 3.99pc and Permanent TSB gained 4.51pc. All three were in the top five risers on Euronext Dublin.

“You’re just seeing a classic panic into bonds and then back into equities as people rotate in and out of risk,” said Davy chief economist Conall Mac Coille. “Bond yields are moving like crazy.”

Investors had been piling into government bonds in recent days both because of a flight to safety and on speculation that the Federal Reserve and European Central Bank might rethink expected interest rate rises.

This drove down yields as markets reset rate expectations. US 2-year yields fell the most in four decades into yesterday morning, taking other government bonds with them, but these were followed by very sharp increases.

The ECB meets on Thursday. A half-point increase had been widely expected, but SVB’s failure has raised concerns about the impact of higher rates on the financial system.

“The risk-off move in the States paired with the big shift in policy expectations has also set into European markets,” said Liam Dorgan, fixed income manager at Cantor Fitzgerald in Dublin.

“Now, markets are on the edge between 25bps and 50bps this week. The scale of interest rate moves has been unbelievable the last few days.”

The sell-off in bonds seems to suggest that markets are recovering their belief in further aggressive hikes, but the situation is far from stable.

“The next 24 hours will be crucial,” said Mr Mac Coille. “There is downside risk, but the ECB intends to press on. Members have been quite hawkish, as we saw from [chief economist] Philip Lane in Dublin last week.”

Data in the US showing core inflation at 6pc supports further hikes by the Fed, he said.

Meanwhile, analysts said they expected European bank shares to bounce back as investors began to distinguish between problems in specific American regional banks and a wider financial system issue.

“Particularly in Europe, the sector is in far better shape compared to the previous crisis and we don’t see any risks, such as the one the US regional banking sector is exposed to, amid its better management of duration risk and stringent regulatory requirements,” said Vincent Mortier, chief investment officer of Amundi Asset Management in a note to clients.

“The effect on banks could be more connected to their earnings trajectory, which is our focus at the moment. Overall, this event adds to the case of selection and differentiation among banks.”

The Central Bank here said it was “monitoring the situation” at Irish banks and found no direct exposures to the problems at Silicon Valley Bank.