Europe's STOXX 600 share index fell 0.9%, as regional banking stocks dropped 1.7%.
MSCI's broad index of global stocks was steady, as Asian markets outside of Japan ticked higher in line with rising Wall Street futures. Shares in troubled San Francisco-based lender First Republic Bank hit a record low on Tuesday as it disclosed a $100 billion plunge in deposits, reviving fears over smaller U.S. banks that began with Silicon Valley Bank's collapse in March.
But ahead of quarterly results from Facebook parent Meta Platforms later in the day, Nasdaq futures were up 1.2% on Wednesday morning in Europe and S&P 500 futures gained 0.3%.
Microsoft's Frankfurt-listed shares rose 7.4% after its quarterly results, issued after the U.S. stock market closed on Tuesday, beat analysts' forecasts. A $70 billion share buyback announced by Google parent Alphabet also looked set to insulate the mood on Wall Street from banking sector troubles. U.S. and European financial conditions have tightened significantly since the Federal Reserve and European Central Bank embarked on their most aggressive interest rate-hiking cycles for decades last year to battle inflation.
This has dented confidence towards loan-dependent sectors such as real estate, and raised questions over how global banks will deal with defaults. Deposit flight from U.S. banks has prompted investors to dial down profit expectations for the global banking sector, with banks under pressure to raise interest rates on savings accounts to keep hold of customers' money.
"Banks around the world want to make sure their deposits will stay," said Jason Da Silva, director of global investment strategy at Arbuthnot Latham in London.
"So there's an expectation in the market that banks' earnings and net interest margins have probably peaked."
The benchmark S&P 500 and Nasdaq indexes had both fallen heavily on Tuesday following weak consumer confidence data, while bonds rallied sharply and interest rate futures markets priced in a higher chance of Fed cuts later in the year.
U.S. ten-year yields fell nearly 12 basis points (bps) on Tuesday, their sharpest drop in more than a month, while steadying about 2 basis points higher at 3.398% on Wednesday morning in Europe. Germany's ten-year yield slipped 2 bps to 2.375% after dropping 11 bps in the previous session.
On Wednesday, the U.S. dollar index was steady against most majors after a 0.5% gain the day before. The euro edged 02% higher to $1.10. Gold was pinned just below $2,000 an ounce. The yen was steady at 133.6 per dollar ahead of the Bank of Japan's meeting this week, as markets await clues from new governor Kazuo Ueda about whether he might ditch policies that have suppressed domestic bond yields and the yen.
Brent crude futures hovered at $81.35 a barrel, having dropped almost 4% overnight with the risk-averse mood. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates YTD Global asset performance Asian stock markets ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Sam Holmes and Bernadette Baum)
