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Sliding bank shares dragged the S&P 500 lower on Monday with investors worried about contagion from the Silicon Valley Bank collapse, but trade was choppy and some sectors benefited from hopes the Federal Reserve could ease up on interest rates hikes. The Canadian benchmark stock index tumbled nearly 1% amid hefty declines in energy and financials sectors, as domestic bond yields plunged the most in years.

SVB Financial’s sudden shutdown on Friday after a failed capital raise had investors worried about risks to other banks from the Fed’s sharp rate hikes over the last year. But many speculated the central bank could now become less hawkish, sending the yield on the U.S. 2-year Treasury tumbling.

Declines in Canadian bonds were nearly as brisk. The 2-year Canada government bond by late day was yielding 3.574%, down 40 basis points. Over the last three trading days, they’ve seen their largest drop in more than 30 years, according to BMO Capital Markets calculations. Credit markets are betting the the Bank of Canada will soon transition to easier monetary policy in the wake of the banking crisis in the U.S. By late day Monday, implied interest rate probabilities in overnight swaps markets suggest the bank could cut rates by 75 basis points by the summer.

Just last week, money markets were pricing in a further hike in interest rates by the Bank of Canada this year.

The view in credit markets of central bank moves are constantly changing. And on Monday, some economists and market observers were already expressing doubt that the bank would cut interest rates to that degree.

“While we’ve long since learned to never say never, it seems that such a swift reversal could be seriously ill-advised,” Douglas Porter, chief economist, said in a note late Monday. “Headline and core inflation are lodged above 5%; fiscal policy is already providing support; the Canadian dollar is still down more than 6% y/y; and the TSX is still up in 2023, even with a big retreat in the past week. And, the labour market is drum-tight, while housing has only blown off some of the pandemic froth.”

“The point being that with inflation at its most fiery level of the past 30 years, central banks can’t just quickly revert to the old playbook of cutting rates at the first sign of market stress,” he said.

Regulators over the weekend stepped in to restore investor confidence in the banking system, saying SVB’s depositors will have access to their funds on Monday.

To some investors, the Fed’s decision next week will also hinge on inflation data due this week.

“If we get shockingly bad Consumer Price Index and Producer Price Index, the Fed is going to find itself in a tough spot or a much tougher spot that it even finds itself in ahead of those prints,” said Orion Advisor Solutions CIO Timothy Holland.

The S&P 500 lost 0.15%, while the Nasdaq Composite gained 0.45%. The Dow Jones Industrial Average fell 0.28%.

The benchmark S&P 500 is now up about 1% for the year so far. Earlier in the session it fell, briefly erasing all the year-to-date gains.

The CPI data is due on Tuesday and PPI on Wednesday.

The defensive utilities sector was among the best performing of the 11 major S&P sectors while interest rate sensitive groups such as real estate and technology also climbed.

“The market is now expecting that the Fed is likely to not raise rates this month and so they may enter a pause period,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

Shares of SVB’s peer Signature Bank, which was also shut down by regulators, were halted. Nasdaq said they would remain so until the exchange’s request for additional information was “fully satisfied.”

President Joe Biden vowed to do whatever was needed to address the threat to the banking system.

First Republic Bank fell sharply as news of fresh financing failed to reassure investors, and so did Western Alliance Bancorp and PacWest Bancorp. Trading in the stocks was halted several times.

Weighing on the S&P 500, Charles Schwab tumbled upon resuming trade after the financial services company reported a 28% decline in average margin balances and a 4% fall in total client assets for February.

Shares of big U.S. banks, including JPMorgan Chase & Co , Citigroup, and Wells Fargo all lost ground.

The CBOE Volatility Index, known as Wall Street’s fear gauge, ticked higher.

Traders are now largely pricing in a 25 basis point rate hike from the Fed in March, with bets that the central bank will hold interest rates at their current level standing at 31.4%.

Among individual stocks, Pfizer Inc was up after the drugmaker said it would buy Seagen Inc for nearly $43 billion.

The Toronto Stock Exchange’s S&P/TSX composite index closed down 186.02 points at 19,588.90, recovering from the day’s low of 19,427.53, which was the lowest since Jan. 5.

“The Canadian banks, most of them have some exposure into the U.S.. Bank of Montreal (BMO), TD all have exposure in the U.S. so there is some concern around those ones,” said Mike Archibald, a portfolio manager at AGF Investments.

Toronto Dominion Bank shares fell as low as 4% but recovered to end down 3.3% while Royal Bank of Canada fell 1.4%. Bank of Nova Scotia dropped 2.5% and CIBC fell 4% but respectively recovered to flat and down 1.4%. BMO ended down 2% after falling as much as 5.5%.

“I think financials in general are going to be a very volatile space for the coming few weeks and months,” he added.

Canadian banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), on Sunday said it was taking temporary control of SVB’s unit in the country.

The financials group was down 2% by close on Monday after recovering slightly from losing 2.5% in the early morning trading session when many other Canadian stocks also fell.

Shares in Canadian digital advertising-tech firm AcuityAds Holdings Inc jumped 7.7% after it resumed trading on Monday. The stock tumbled more than 15% on Friday before the stock was halted after it said it maintained U.S. bank accounts with SVB which amount to $55 million in deposits.

Energy stocks were down 4.9% and industrials down 1.1% in early morning trading but down 4.5% and 0.5% respectively by 4 p.m ET.

The materials group, which includes precious and base metals miners and fertilizer companies,, was the best performing for the day, up 2.1%.

Investors fled to gold on Monday, with the precious metal up 2.4% to its highest since early February..

The Canadian dollar rose against its U.S. counterpart on expectations the Federal Reserve will be less aggressive in raising interest rates to curb inflation amid concerns over the fallout from the SVB collapse. The loonie was trading 0.7% lower at C$1.3738 to the greenback, or 72.81 U.S. cents.

Reuters, Globe staff

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