Asia shares bounce warily as bank concerns persist
Asian stocks scraped off lows yesterday, with the rescue of Credit Suisse stemming selling in bank shares, though the mood was fragile and the stress in the financial system had traders unsure how Federal Reserve policymakers will respond this week.
The Fed was to begin a two-day meeting later yesterday,continue and after a wild few sessions US interest rate futures pricing implies that a peak in rates is either imminent or already reached, with newfound stability concerns to push inflation-fighting aside.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4%. Australian shares rose 0.9% to leave behind a four-month trough, while in Hong Kong, HSBC and Standard Chartered stocks each rose more than 1.5% to steady themselves after a clobbering on Monday.
Japanese markets were closed for a holiday, which left Treasuries untraded in Asia and lightened currency trade. S&P 500 futures were flat and European futures rose 0.5%.
The tense calm follows a Swiss government-backed buyout of Credit Suisse by UBS that seems, for now, to have cauterised concerns over European financial stability.
But the wipeout of some Credit Suisse bondholders has already sent a shockwave through bank debt, while the speed with which trouble spread from regional US banks to humble a big systemic bank in Europe has markets rattled.
“While the last global financial crisis played out over 18 months, today’s crisis is only 10 days old and has already led to the collapse of some US regional banks and the arranged marriage of UBS and Credit Suisse at 0.06x book (value),” said bank analyst Jonathan Mott at Barrenjoey in Sydney.
“While global regulators are acting with pace, this appears to be a game of ‘whack-a-mole.’”
San Francisco lender First Republic is emerging as the next pressure point.
Its share price halved on Monday on worries that $30 billion in deposits placed last week by bigger banks would not be enough to shore up its stability.
US officials are looking at ways to temporarily expand Federal Deposit Insurance Corp coverage to all deposits, Bloomberg News reported on Monday.
The dust is also yet to settle on the writedown of Credit Suisse’s “additional tier 1” debt to zero.
It set off frantic selling of similar debt 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, and prices stabilised in Asia yesterday.
“Over the last 24 hours as more details have come out, some people are realising that maybe the initial reaction was not the right one,” said Thomas Jacquot, head of research at fixed income broker FIIG in Sydney. “You can’t take this as a precedent — it’s an exception. It’s (only) a precedent in Switzerland.”
The broader path for rates, meanwhile, is set to become clearer later in the week when the Fed and Bank of England set policy levels.
Fed funds futures imply about a 1-in-4 chance the Fed pauses tomorrow, according to CME’s FedWatch tool, while markets are divided evenly on the prospect of a hike in Britain.
“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.
In foreign exchange the US dollar steadied after slipping overnight. It last bought 131.30 yen and held at $1.0711 per euro.
In commodity markets, demand jitters have Brent crude futures pinned below $80 a barrel; they were last at $73.15. Gold hit a one-year high of $2,009 an ounce on Monday, before easing to $1,980 yesterday.