"We expect a 25-basis-point rate hike," economists at TD
Securities said. "Post-meeting communication is likely to
emphasize that the Fed is not done yet in terms of tightening,
with officials also flagging the more uncertain economic
environment."
By mid-morning in New York, the Dow Jones Industrial Average rose 0.70%, the jumped 0.85%, and the Nasdaq Composite Index gained 0.89%. First Republic Bank , the lender currently drawing the most concern from U.S. investors, surged 33.4% on news that JPMorgan CEO Jamie Dimon is leading talks with other big banks on new steps to stabilise First Republic with a possible investment.
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. 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. Spot gold prices took a breather on Tuesday and were down 1.37% at $1,951.59 an ounce.
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 index was flat at 103.19 against a basket of
currencies 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 .
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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,
Susan Fenton and Andrea Ricci)
