Rising contagion risk in US banks sends indices into decline

Indices fall sharply as US banks weigh on Wall Street

• SVB and Silvergate woes hit the banks: Smaller US banks could generate contagion risk for bigger players. 
• A flight to safety of US Treasuries: Yields fall sharply as investors look for the safe haven of US Treasuries.
• Wall Street continued its pullback: US indices fell sharply into the close last night and US futures show further declines today. This is dragging European indices lower.
• USD is choppy on the news: Safe haven flows support USD but lower yields restrict the upside, leaving the USD neutral on major forex.
• Precious metals are supported, oil is falling: In commodities, lower yields and a weaker USD support gold and silver. However, the negative sentiment is dragging oil lower.
• Nonfarm Payrolls are the next key risk event: Nonfarm Payrolls are expected to show jobs growth of 205,000 in February, versus 517,000 in January.

US banks sell-off to drag indices lower 

There are growing concerns of contagion risk in the US banking sector.

Silvergate (a crypto bank) announced yesterday a voluntary liquidation of its business. Another bank, Silicon Valley Bank (SVB) announced a $1.75bn share sale to shore up its balance sheet.

It was also reported that there were significant withdrawals of deposits from client accounts. 

The news flooded selling pressure across the sector, with the shares of US banks on the S&P 500 shedding -$80bn in value.

JP Morgan Chase was down -5.4%, losing $22bn of its value and was the biggest drag on the S&P 500 Index decline which was down -1.9% yesterday.

The risk of contagion weighs on broader sentiment

The big US banks have come under significant regulatory scrutiny to ensure their balance sheets are robust enough to cope in situations such as these.

However, the risk of contagion is elevated. This leaves broader market sentiment under pressure.

This has driven flow back into buying the safe haven of US Treasuries. This has pulled yields sharply lower.

The US 2-year yield has been over -30bps in the past couple of days.

Negative sentiment is being most keenly felt in equity markets:

• European indices are sharply lower by c. -1.8% this morning, playing catch up on Wall Street declines yesterday.
• US futures are another -0.6% lower overnight

However, in forex, this risk aversion with lower US yields is leaving the USD in a curious position. There is a contradictory impact on price action:

• The USD is supported by safe haven flows 
• But the USD is also dragged lower by falling yields.
• Additionally, there is caution ahead of a crucial Nonfarm Payrolls report later.
• This is all adding up to a neutral position on the USD this morning.

Selling on US futures 

S&P 500 futures (SP500ft) are increasingly corrective

The corrective pressure accelerated yesterday and has continued lower today. 

• A downtrend channel has formed over the past month.
• The market is trading below the 21 & 55-day moving averages, reflecting a growing near to medium-term negative outlook.
• The daily RSI failed at 50 and is in the mid-30s with downside potential.

This suggests that near-term rallies are increasingly seen as a chance to sell.

The support at 3901 is breaking intraday this morning, and if this move is held into the close it would open for a much deeper correction towards the key December low at 3788.

Initial resistance is between 3925/3970.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IXOne

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