Asian stocks were lifted from lows on Tuesday, with the rescue of Credit Suisse stemming selling in bank shares, though the mood was fragile and the stress in markets had traders wondering whether U.S. rate hikes might be finished. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5% in early trade. Australian shares bounced 1.3% from Monday’s four-month trough and the Hang Seng opened 0.7% higher.
Japanese markets were closed for a holiday, though Chicago-traded Nikkei futures were in the green. Overnight an early selloff in Europe was reversed and on Wall Street the S&P 500 rose 0.9%. U.S. futures rose 0.2% in early Asia trade. A Swiss government-backed buyout of Credit Suisse by UBS has cauterized the immediate concern over European financial stability. But the wipeout of some Credit Suisse bondholders has sent a shockwave through bank debt, and persistent signs of stress at U.S. regional lenders has investors on high alert.
“Globally, I think we’re a long way from being out of the woods on this,” Sydney-based Jefferies’ banking analyst Brian Johnson said, with the present stress set against a backdrop of higher capital costs and declining loan growth.San Francisco lender First Republic seems to be a case in point. Its share price halved on Monday on worries that $30 billion in deposits posted by bigger banks less than a week earlier would not be enough to shore up its stability.
The writedown of Credit Suisse’s “additional tier 1” debt to zero also set off frantic selling of similar debts at other banks because holders were surprised that the long-standing practice of paying creditors before shareholders was not fully followed. That somewhat abated after regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent.
A London-listed exchange-traded fund that tracks such debts pared steeper losses to finish 5.7% lower on Monday, but nerves – and higher funding costs for banks – will likely linger. “This remains a significant breakdown in how the credit stack works,” Johnson said. In foreign exchange markets the U.S. dollar steadied after slipping overnight. It last bought 131.90 yen and held at $1.0718 per euro. Bond markets whipsawed overnight as traders seek to figure out what the bank stress means for rates policy.
A holiday in Tokyo left Treasuries untraded in Asia.Central bank meetings in Britain and the United States are scheduled this week, with the Fed first up on Wednesday.U.S. interest rate futures have priced in just one more 25 basis point hike before a series of cuts beginning as soon as June. The CME FedWatch tool shows pricing implying about a 74% chance of a rate hike on Wednesday.
“The banking sector’s near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes,” said Standard Chartered’s head of G10 FX research, Steve Englander.
“If the (Fed) pauses, the message may be that it sees further hikes as markets settle down. But the reality may be that a March pause effectively ends the hiking cycle if the economy slows.”
In commodity markets, demand jitters have Brent crude futures pinned below $80 a barrel; they were last at $73.80. Gold hit a one-year high of $2,009 an ounce overnight, before easing to $1,979 on Tuesday.