Developed Asia Responds to Bank TroublesMarch 15, 2023
The fallout from the Silicon Valley Bank collapse and the continued troubles of other lenders has not been contained to the Western Hemisphere. Market implied policy rates for developed markets in Asia responded quickly and forcefully to fears of banking contagion from the US and now Europe, suggesting investors are expecting a pause if not an outright reversal in central bank policy. Below I show Bloomberg’s Japan WIRP, the future policy interest rate as implied by fixed income markets, as of March 6, 13, and 15, respectively.
Though lenders’ shares have seen a global rout recently, Japan’s unique monetary policy situation likely limited the impact of international banking fears on expectations for Bank of Japan policy. While implied rates for Japan responded similarly to others around the world, they have just about returned to pre-SVB collapse positioning.
Already-hawkish Australia tells a vastly different story. Below is the Australia WIRP readout for the same dates:
Investors have responded to banking concerns by almost reversing implied Australian rates in just over a week, painting a muddled picture with no clear expected peak and implying a confused cut-hike-cut forecast.
New Zealand takes the middle ground between Japan and Australia, with investors’ response over the past two weeks pricing in first one extra cut, then two.
New Zealand WIRP for March 6, March 13, and March 15:
As they have around the world, trepidation around bank prospects have spun market action to indicate an accelerated New Zealand rate hiking cycle, with peak policy rates expected to come much sooner than was expected as recently as five trading sessions ago.
These metrics are, however, based entirely on a tense flurry of investment activity. Recent news coming out of Swiss giant Credit Suisse has served only to inflame tensions further. With the Saudi National Bank, one of Suisse’s largest stakeholders, refusing to extend any more capital to the troubled lender, traders are showing trepidation over the breadth of this crisis. Recent action as illustrated by these WIRP readouts indicates one clear sentiment: who’s next?
As of 12/31/22 none of the securities mentioned were held in the Knowledge Leaders Strategy.