Shares of Japan’s biggest banks dropped sharply on Tuesday as global markets reacted to a US banking sector sell-off and uncertainty over interest rates in the wake of the collapse of Silicon Valley Bank.
Traders in Tokyo said they were expecting a second day of massive equity market support from the Bank of Japan to fend off a deeper rout. Japan’s Topix Banks index was down as much as 7.8 per cent, on track for its worst day in more than three years, while the Topix fell more than 3.1 per cent.
The hit to Asian banking stocks came after investors dumped shares in a clutch of US regional lenders on Monday, despite pledges by President Joe Biden to do “whatever is needed” to protect depositors from the fallout of SVB’s implosion.
Investors are also waiting for US inflation data on Tuesday that is expected to show that price pressures remain high, potentially complicating the path for the Federal Reserve to decide on interest rates as it contends with three bank failures and concerns about financial stability.
The collapse of SVB and ensuing turmoil in the banking system has raised expectations among investors and economists that the Fed might slow the pace of interest rate increases, sending Treasury yields down.
At the weekend the Fed announced an emergency lending facility and guaranteed that all depositors in SVB and Signature Bank could retrieve their funds, while the UK government helped broker a deal for HSBC to purchase SVB’s local arm.
Despite the interventions US bank stocks plunged on Monday. The KBW Nasdaq Bank index fell 11.7 per cent in the US, with regional banks plummeting most sharply over concerns that smaller lenders could have more precarious balance sheets.
First Republic Bank fell 61.8 per cent, Western Alliance Bancorp lost 47.1 per cent and KeyCorp dropped 27.3 per cent.
Asia stocks fell on Tuesday, dragged down by banks. South Korea’s Kospi was down 1.9 per cent. Hong Kong’s Hang Seng index shed 1.8 per cent while China’s CSI 300 declined 0.8 per cent.
In Japan shares of MUFG, Mizuho and SMFG fell between 7.5 per cent and 8.1 per cent.
“The probability of Fed rate hikes appears lower, [Japanese government bond] yields are down and the yen is stronger. It’s a huge change of market environment and that is why bank stocks are falling,” said Mizuho Securities chief equity strategist Masatoshi Kikuchi.
The BoJ revealed on Monday evening that it had stepped into the Tokyo equity market for the first time since early December 2022, buying $5.2bn worth of exchange traded funds.
“Once you saw the Topix falling below 2 per cent on Tuesday, you could pretty much tell the BoJ was going to be buying again. I think we can expect this to become the pattern until this is resolved,” said one Tokyo based equity broker.
SoftBank, the Japanese technology conglomerate exposed to the fallout triggered by the SVB collapse, dropped 3.4 per cent in early trade. SoftBank has said it expects little or no impact on its portfolio companies or its own finances.
US Treasury prices eased on Tuesday, with the yield on the 10-year note gaining 3 basis points to 3.543 per cent and the yield on the two-year note adding 2 basis points to 4.054 per cent. Yields move inversely to price.
That followed a decline of 0.62 percentage points in the yield on the two-year note on Monday, the biggest single-day drop since 1987.
Additional reporting by Colby Smith in Washington