Many investors had thought concerns about the stability of the banking sector were a thing of the past after the 2008 crisis. But the collapse of a number of U.S. regional lenders, plus the eleventh-hour rescue of Credit Suisse, are forcing central bankers to prioritise fighting inflation alongside keeping money flowing through the financial system.
The jury is out on whether the Bank of England will hold fire when it meets this week, and the picture isn't much clearer for the European Central Bank, which raised rates last week, but left traders without much idea of what to expect next. "It seems the penny is dropping, most central banks hiked interest rates too late and then raised rates too fast. And now the world is reeling with a banking crisis," Saxo Bank strategist Jessica Amir said. European banking stocks, which look to be heading for their biggest monthly slide in three years, rose by 3.5% on Tuesday, helping lift the regional STOXX 600 index by 1.4%, while other measures of investor risk aversion subsided. The Swiss government-backed takeover of Credit Suisse by UBS has helped soothe concerns over European financial stability. But the wipeout of some Credit Suisse bondholders has sent shockwaves through bank debt markets, while the speed with which trouble spread from regional U.S. banks to humble a big systemic bank in Europe has rattled markets. That said, the financial sector is a lot more robust generally than it was 15 years ago, so another 2008-style crisis is unlikely, even if it doesn't feel like it right now, according to Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management. "We may not be past the worst of the volatility. But I don't think that this is going to escalate, a vicious cycle kick in, and give us a deep or prolonged downturn. It probably will change what the central banks do, because they will not need to lean so hard on the economy, because the financial system itself will start to lean harder on the economy,” Ward said, in remarks to an asset management conference. San Francisco lender First Republic is in the line of fire right now. Its share price halved in value on Monday on worries that $30 billion in deposits placed last week by bigger banks would not be enough to shore it up. U.S officials are looking at ways to temporarily expand Federal Deposit Insurance Corp coverage to all deposits, Bloomberg News reported on Monday. "While global regulators are acting with pace, this appears to be a game of 'whack-a-mole'," bank analyst Jonathan Mott at Barrenjoey in Sydney said. With so much tension in markets right now, gold has shot up to around $2,000 an ounce this week for the first time in a year.
ADDITIONAL TEARS At the heart of Monday's steep drop in banking shares was the $17 billion writedown in Credit Suisse's "additional tier 1" debt - part of its capital buffers - to zero. Bondholders usually outrank shareholders in the event of a restructuring or bankruptcy. But Credit Suisse AT1 owners ended up empty-handed, which unleashed a wave of selling in this kind of debt in the European market.
Regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent, and prices stabilised on Tuesday, when it became apparent that the Credit Suisse write-down was more a function of Swiss rules. With the focus on the outlook for monetary policy, the dollar eased modestly against a basket of currencies to trade around its lowest since Feb. 14, as investors grew confident enough to dip into other assets. Fed funds futures imply about a 1-in-4 chance of the Fed pausing on Wednesday, according to CME's FedWatch tool, while markets are divided evenly on the prospect of a hike in Britain when the Bank of England meets on Thursday. "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. The dollar rose 0.7% against the yen to 132.195 and lost out to the euro, which rose 0.5% to $1.0778 .
Gold hit a one-year high of $2,009 an ounce on Monday, before easing 0.5% to $1,968 an ounce on Tuesday. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates YTD Global asset performance Asian stock markets ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by Iain Withers in London and Tom Westbrook in Sinagpore; Editing by Jacqueline Wong, Mark Potter and Susan Fenton)
