MARKET WRAPS
Stocks:
European stocks tumbled on Friday led by steep losses for the banking sector on worries over their health, after a series of interest-rate hikes around the world and following the SVB Financial-led selloff on Wall Street.
The trouble at SVB stems from a decline in deposits from clients, many of which are venture-capital firms. SVB shares fell 60% on Thursday. It raised the alarm for other banks, which many investors had considered fairly insulated from an economic downturn and likely to benefit from rising interest rates.
Part of the issue is that short-term rates, which the big banks use for borrowing, are now higher than longer-term rates, the benchmarks banks use for lending. That's squeezing profitability.
"This is an issue that could hit all the banks, including the big banks, because the banks amassed a lot of assets since the 2007/2008 financial crisis at rising prices, and they had to pay nearly no compensation for bank deposits, as interest rates have been near zero for such a long time," Swissquote Bank said.
Shore Capital said U.S. bank shares fell due to concerns about SVB, raising contagion fears and increased market jitters around net interest margins being squeezed by higher deposit betas, but said it didn't see this as a 'Lehman's moment' for the industry.
U.S. Markets:
Stock futures and bond yields were falling as investors awaited the nonfarm payrolls report that could play a major role in the Federal Reserve's interest-rate decision this month.
Stocks to Watch
SVB Financial was down 25% in premarket trading after plummeting more than 60% on Thursday. The tech-focused lender was forced to sell securities to realign its portfolio in response to higher interest rates while it manages lower deposit levels from clients, many of which are in the venture capital arena and burning through cash.
The troubles at SVB rippled across the banking sector. Banks both big and small tumbled on Thursday and remained under pressure premarket. These included: JPMorgan Chase, U.S. Bancorp, First Republic Bank and Charles Schwab
Oracle reported fiscal third-quarter revenue that missed analysts' estimates. The stock was down 5% in premarket trading.
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Forex:
U.S. monthly jobs data at 1330 GMT will need to be on the high side of expectations to boost the dollar, while a weaker-than-expected number could cause it to fall, UniCredit said.
"Only if the new data surprise on the high side...might the dollar index break higher again," potentially enabling the DXY dollar index to exceed the recent peak of 105.88.
"The net job creation of less than 200,000 that we expect for February in the U.S. will likely spark additional book squaring to the dollar's detriment."
Read US Employment Gains Likely to Slow in February
ING said pressure on the U.S. banking system could dent the dollar as it casts doubt on the Fed continuing its aggressive interest rate-rise cycle.
Heavy losses for SVB has raised questions over unrealised losses on bond portfolios among U.S. banks, ING said.
"This has seen two-year Treasury yields drop 25 basis points over the last two days alone. It is dollar bearish."
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Sterling gained after Friday's U.K. economic growth data but it looks vulnerable to signs of U.S. banking system stress, ING said.
"If the banking stress story has a little further to run we can expect a little sterling under-performance, given the relatively large size of financial services in the U.K. economy."
ING said EUR/GBP could rise above 0.8900 while GBP/CHF may fall to 1.1000.
European Central Bank
A number of observations suggest the ECB is more likely to stop before 4% rather than go beyond 4% with interest-rate rises this year, Commerzbank said.
At 4%, all Governing Council members will probably agree that rates are restrictive, while the pick-up in economic activity expected for later this year looks too optimistic.
Read Commerzbank Raises Forecast for ECB's Peak Deposit Rate
Societe Generale said the ECB isn't expected to deliver much to surprise the market next week in terms of monetary policy decisions.
It expects the market reaction will depend on the degree of perceived hawkishness of the press conference, SocGen said. In line with broad-based market expectations, it has forecast the ECB to raise interest rates by 50 basis points, bringing the deposit rate to 3%.
Bonds:
The German 10-year Bund yield is expected to peak close to 3% in the first half of the year, Societe Generale said.
Given the scope for more yield rise from current levels, SocGen remains cautious on duration--a measure of the sensitivity of a bond to interest rate changes. "It is still too early for duration longs."
After peaking at around 3% in 2Q, SocGen expects the yield to decline to 2.8% in 3Q and 2.6% in 4Q.
SEB expects the yield to rise to 2.9%-3% in the coming months, with a significant further increase in long rates likely to be driven by a combination of continued economic resilience, further upside surprises to inflation and higher policy rate expectations.
"A period of consolidation seems more likely to us now, but we expect new highs in long yields to be printed in the coming months," SEB said.
Energy:
Oil prices were down around 1% and on course for a sharp weekly loss ahead of the latest U.S. jobs report, with a strong print likely to intensify expectations of a more hawkish Fed, which could mean weaker risk assets, ING said.
Metals:
Base metals were around 1% lower, with gold a touch firmer, as traders looked away from risk assets ahead of the U.S. jobs report.
"Markets have been in risk-off mode since Powell's hawkish comments mid-week," Peak Trading Research said.
"A strong nonfarm payroll print would drive another wave of selling across the commodity complex via hawkish Fed expectations and a stronger dollar," it said, indicating any number above 400,000 would spur selling.
DOW JONES NEWSPLUS
EMEA HEADLINES
European bank stocks slide on worries over their holdings of bonds
Shares in European banks slumped on Friday on worries over their health after a series of interest-rate hikes around the world.
The Stoxx Europe 600 XX:SX7P banks index dropped over 4%, with shares in Deutsche Bank XE:DBK down 7%, Bank of Ireland IE:BIRG down 6% and HSBC Holdings UK:HSBA falling 5%. On Thursday, the SPDR S&P Regional Banking ETF KRE slumped 8%.
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Leonardo 4Q Profit Fell Despite Higher Revenue, Orders
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Swedbank Books $3.7 Mln Provision for Potential Deal With US Treasury
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