HONG KONG (AFP) – Asian and European markets bounced yesterday from the previous day’s rout, with lenders boosted by easing concerns of another financial crisis, while focus turned to the Federal Reserve’s (Fed) policy decision later in the week.
The panic that characterised trade over the past 11 days appeared to have faded after authorities in leading economies pledged support for depositors and troubled banks following the collapse of Silicon Valley Bank and Signature Bank in the United States (US).
Still, the takeover of troubled Credit Suisse by UBS for USD3.25 billion fanned concerns about what could be next on the chopping block, and analysts warned it was too early to say that the crisis was over.
The move to save Credit Suisse aimed to prevent a wider crisis as it is among the 30 global banks considered “too big to fail”.
All three main indexes on Wall Street ended on the front foot – with the Dow more than one per cent up – while European markets were also comfortably higher, helped by promises of support from the Fed and other central banks as well as the saving of Credit Suisse.
However, embattled First Republic Bank collapsed almost 50 per cent, despite a coalition of US lenders saying they would inject USD30 billion into it.
But CMC Markets analyst Michael Hewson said: “The problems being felt in the US banking system were being shrugged off with further weakness in First Republic Bank being treated as a localised difficulty, rather than anything more systemic.”
There was also less concern over high-risk debt markets as holders of such bonds at Credit Suisse, known as AT1s, will lose USD17.3 billion after authorities required that they be written off.
The assets, also known as “CoCo” bonds, tumbled on Monday as they were wiped out in the deal despite equity investors getting some of their cash back. That led traders to question the usual hierarchy of bonds over stocks.
However, European officials on Monday reiterated that the usual structure remained the same for claims.
The upheaval in the banking sector has led traders to re-evaluate their bets on the Fed’s interest rate plans, with speculation swirling that it will even cut rates by the end of the year to provide some stability, despite still-elevated inflation.
Before the crisis kicked off, expectations were for borrowing costs to go as high as six per cent, but now forecasts are for them to end at around four per cent.
They are currently at 4.5-4.75 per cent, and there is much talk about whether the US central bank holds fire at its decision today or lifts rates by 25 basis points.
“Given the uncertainty in US regional Main Street banks, who do the bulk of the heavy lifting in consumer, small business and agricultural loans across America’s heartland, there is a good chance the Fed prioritises stability over inflation this meeting,” said SPI Asset Management’s
Stephen Innes. “And with oil tanking in the first quarter, the inflation problem could look relatively less urgent for this meeting.
“The good news is that the headline has fallen for eight consecutive months; the bad news is that 5.5 per cent on the core is still far from the target. To be clear: US inflation is still a serious issue, and it’s not coming down as fast as most expected.”
And Ed Yardeni, of Yardeni Research, said: “Further rate hikes are no longer warranted, in our opinion.”
Hong Kong rose yesterday, with lenders HSBC and Standard Chartered well up, while Shanghai, Singapore, Seoul, Taipei, Manila, Mumbai, Bangkok and Jakarta were also in positive territory.
Sydney rallied thanks to advances for National Australia Bank and Westpac. London, Paris and Frankfurt were also boosted by rallies in banks in opening trade.
Lower expectations for US interest rates were also weighing on the dollar, which has tumbled against its peers and struggled to recover yesterday, while oil prices fell again as investors fret over the impact on demand from a possible recession.