Photo/Illutration Customers line up outside of the Silicon Valley Bank headquarters, prior to it opening, in Santa Clara, California, U.S., March 13. (REUTERS)

SINGAPORE--Asia’s share markets slid on Tuesday, with Japan’s financial stocks leading losses as fear of a U.S. banking crisis gripped investors ahead of crucial inflation data due later in the day.

Fallout from the collapse of U.S. lenders Silicon Valley Bank and Signature Bank widened overnight, despite government efforts to shore up confidence. Heavy selling hit U.S. regional bank stocks and traders raced headlong from bets on U.S. rate hikes, reckoning the Fed would now be thinking twice.

Two-year Treasuries had their biggest rally since 1987, and U.S. interest rate futures soared--with markets pricing out any chance of a 50-basis-point rate hike next week and baking in nearly 70 bps of cuts by year end.

On Tuesday MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.5% in early trade, with financials in Australia dragging the most.

Japan’s Nikkei dropped 2%. The Tokyo Stock Exchange’s banks index fell 7.4% in early trade, putting it on course for its steepest drop in three years.

“Bank runs have started (and) interbank markets have become stressed,” said Damien Boey, chief equity strategist at Sydney-based investment bank Barrenjoey.

“Arguably, liquidity measures should have stopped these dynamics but Main Street has been watching news and queues – not financial plumbing,” he said. “Fear has started to feed on itself, and higher uncertainty by itself has triggered its own de-leveraging and de-risking dynamics.”

Overnight the VIX volatility index, nicknamed Wall Street’s “fear gauge,” shot higher and other indicators of market stress showed early signs of strain. The S&P Banking Index fell 7%, its largest one-day percentage drop since June 2020.

Big bank shares including J.P. Morgan, Citigroup, and Wells Fargo all lost ground, but regionals were hit hardest with First Republic Bank down 62%, Western Alliance down 47% and PacWest down 21%.

In Tokyo, Resona Holdings led losses with a 9% slide, followed by Sumitomo Mitsui Financial Group, down 8%.

President Joe Biden sought to reassure depositors by vowing to ensure the safety of the U.S. banking system and the Fed on Sunday announced a new funding mechanism to help banks find ready cash.

Banks can now borrow against the par value - and not the lower market value--of their bond portfolios.

Elsewhere, the dramatic re-pricing of U.S. rate expectations has knocked the U.S. dollar lower.

It was last hovering around 133.25 yen and $1.0718 per euro.

Nerves have capped oil prices, with Brent crude futures pinned near $80 a barrel.

U.S. inflation data due later in the day is likely to inject more volatility, even if investors see the Fed prioritizing financial stability.

“The prospect for the market to ‘look through’ strong U.S. data in the current environment could reduce upside U.S. dollar risk through (the) CPI, which would mark a significant departure from the fully data-dependent environment in place as recently as a few days ago,” said NatWest Markets strategist Jan Nevruzi.

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