US bank stocks closed higher on Monday as investors assessed efforts to address turmoil in the sector and looked ahead to the Federal Reserve’s upcoming decision on US interest rates.
The KBW Nasdaq Bank index ended up 0.8 per cent, with heavyweights such as JPMorgan Chase and Morgan Stanley rising 1.1 per cent and 1.8 per cent, respectively. However, shares of First Republic sank 48 per cent despite recent efforts to shore up the regional bank.
The gains were mirrored in Europe, where the Euro Stoxx Banks index closed up 1.3 per cent, as many of the region’s biggest names recovered from early declines.
Fears over the banking sector have spread after the collapses of Silicon Valley Bank and Signature Bank in the US this month. In Switzerland, regulators brokered a takeover of a weakened Credit Suisse by UBS. Global central banks worked to improve access to dollar liquidity over the weekend.
UBS erased losses of more than 14 per cent to finish 1.3 per cent higher. However, France’s Société Générale was down 0.8 per cent and shares in Credit Suisse dropped 55.7 per cent as its shareholders faced a heavy writedown in value from the UBS takeover.
In the US, benchmark stock indices moved higher, with the blue-chip S&P 500 adding 0.9 per cent and the tech-heavy Nasdaq Composite rising 0.4 per cent. In Europe, the Stoxx 600 index rose 0.8 per cent while the FTSE 100 gained 0.9 per cent and the CAC 40 in Paris added 1.3 per cent.
“The [Credit Suisse/UBS] deal at the margin reduced the systemic risk of banks failing,” said Emmanuel Cau, head of European equity strategy at Barclays. He added that there was “little conviction in the market . . . it’s a bounce caused by risk to the banking sector and the economy being reduced”.
Investors’ focus is on the Fed’s meeting on Tuesday and Wednesday, in which its latest interest rate decision will be decided. Investors are pricing in a 53 per cent chance of a 0.25 percentage point rise, and a 47 per cent chance of no change. Traders expected the benchmark interest rate to fall to 4 per cent by December.
“They have to show that they are still keeping their eye on the inflationary ball,” said Jennifer Lee, a senior economist at the Bank of Montreal, who expects the Fed to add a quarter point to the federal funds rate. “Anything less than that will reek of panic and make them look soft.”
Analysts at ING said much of the Fed’s decision will “depend on whether a modicum of stability returns to financial markets”, particularly in the case of regional lenders.
The yield on the 10-year US Treasury note rose 0.1 percentage points to 3.49 per cent. The yield on the two-year note was also up 0.14 percentage points to 3.95 per cent.
One element of the rapid takeover of Credit Suisse that is fuelling jitters among debt investors is the deal’s wipeout of $17bn of the bank’s bonds. Swiss regulator Finma demanded on Sunday that SFr16bn ($17bn) of Credit Suisse’s additional tier 1 (AT1) bonds, a type of bank debt designed to take losses during a crisis, be written down to zero as part of the rescue deal with UBS. The Swiss move cast doubt on the hierarchy of claims in the event of a banking failure. It was the biggest writedown ever of AT1 debt, according to Goldman Sachs.
There were heavy declines in Asia, including a 7.1 per cent fall in HSBC shares in Hong Kong. “It is a wake-up call to investors that AT1 bonds carry real risks of being written off in extreme scenarios, which is also the purpose of having such bonds,” said Gary Ng, senior economist at Natixis in Hong Kong. “The move will probably trigger some sell-offs and risk rebalancing from bond investors and wealth management product holders.”
Asian stocks fell. Japan’s Topix shed 1.5 per cent, while South Korea’s Kospi dropped 0.8 per cent and Hong Kong’s Hang Seng index declined 2.7 per cent.
Brent crude, the international benchmark, and WTI, the US equivalent, gained 1.1 and 1.4 per cent, respectively, recovering in the afternoon after falling to their lowest price since December 2021.
Reporting by Katie Martin and Martha Muir in London, Jaren Kerr in New York, William Langley, Cheng Leng and Primrose Riordan in Hong Kong, Leo Lewis in Tokyo and Thomas Hale in Shanghai
