US stocks advanced at the open on Tuesday as investors took heart from regulatory moves to contain the risk of contagion in the financial system and looked towards the Federal Reserve’s next interest rate decision.
The blue-chip S&P 500 rose 0.8 per cent and the tech-heavy Nasdaq rose 0.6 per cent.
The KBW Nasdaq Bank Index gained 4.3 per cent, while beleaguered California-based lender First Republic climbed 30 per cent, having fallen by nearly a half on Monday.
Banks have steadied after regulators’ moves to support banks caught in the recent financial tumult. US Treasury secretary Janet Yellen signalled on Tuesday the government would back all deposits at smaller American banks if needed.
“Over the past few days there has been a continued sentiment of support for the banking sector, including from [European Central Bank president] Christine Lagarde saying they would act on inflation and financial stability, and Janet Yellen showing her support for regional banks,” said Sam Gunter, head of FX trading at Britannia Global Markets. “That’s why we’re seeing equity markets push up and safe haven assets like gold and the yen lose ground.”
Investors have began to turn their attention to decisions on interest rates from the US and British central banks this week. The turmoil in the global banking sector, which began with the collapse of Silicon Valley Bank, has eased expectations of interest rate increases to combat inflation.
The Federal Reserve decision will come after a two-day meeting starting on Tuesday. Futures markets overwhelmingly predicted the Federal Reserve would raise rates by 0.25 per cent on Wednesday, from its current level of between 4.50 per cent and 4.75 per cent. Traders think the central bank will then begin a series of cuts through to the end of the year.
“While a lower price of money may partially relieve financial stress, an overly soft message can create concern that the Fed knows something the rest of us have no idea about, which risks making matters worse,” said analysts at SEB Research.
The Bank of England meets on Thursday but pricing from the swaps markets indicates investors are divided between a 0.25 per cent increase, to 4.25 per cent, and no change.
“The question now is whether banking sector problems are enough to tip the BoE into holding rates,” said analysts at Bank of America. The broker pointed out that the BoE was closer to pausing its rate rises. “And greater uncertainty over the economic outlook as well as potentially tighter credit conditions could therefore tip the BoE into holding rates.”
European stocks also extended their gains on Tuesday as investors took heart from regulatory moves to contain the risk of contagion in the financial system from weak banks.
The Stoxx Europe 600 Banks index rose 5.1 per cent, having gained 1.2 per cent in the previous session.
Broader indices also advanced, with the region-wide Stoxx 600 rising 1.7 per cent, Germany’s Dax 2 per cent, France’s Cac 40 1.8 per cent and London’s FTSE 100 1.9 per cent.
Credit Suisse and UBS, which announced plans to merge in a Swiss government-brokered deal on Sunday, fell 0.1 per cent and rose 7.3 per cent respectively.
As part of the merger deal, $17bn worth of Credit Suisse additional tier 1 (AT1) bonds, a type of higher-risk bank debt designed to take losses during a crisis, was wiped out, Swiss financial regulator Finma said at the weekend.
That triggered a sell-off in AT1 bonds at other financial institutions on Monday, as investors worried that bondholders would have to take on bigger losses than shareholders of Credit Suisse, who were allocated UBS stock.
“It is still very early days. The initial response [to the deal] was not positive but statements from the supervisory arm and policymakers seemed to have been taken pretty well,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. “We’re still in a weaker position but there are tentative signs that things aren’t getting worse.”
The yield on the two-year Treasury note, which closely follows interest rate expectations, jumped 0.2 percentage points to 4.16 per cent on Tuesday while the yield on the 10-year note rose 0.8 percentage points to 3.56 per cent. Yields move inversely to price.
Yields on two-year German Bunds rose 0.2 percentage points to 2.56 per cent, while the 10-year notes rose 0.12 percentage points to 2.24 per cent.
In Asia Hong Kong’s Hang Seng index closed up 1.4 per cent and China’s CSI 300 gained 1.1 per cent. South Korea’s Kospi added 0.4 per cent. Japanese markets were closed for the spring equinox holiday.
Asian banking stocks also gained, with the Hang Seng Finance index adding 1.4 per cent. HSBC and Standard Chartered gained 1.7 per cent and 4 per cent, respectively.
Spot gold prices fell 1.3 per cent to trade at $1,953.64 per troy ounce after briefly touching their highest level since March 2022 on Monday.
