US stocks rose and nerves around banking stocks in Europe eased on Thursday as the world’s central banks calmed investors with promises to maintain financial stability.
In New York, the S&P 500 added 1.8 per cent while the Nasdaq Composite gained 2.5 per cent. The KBW Nasdaq Bank index, which has sold off heavily this week following the collapse of Silicon Valley Bank, rose 2.6 per cent.
Reports that US banks would work together to shore up First Republic Bank with a $30bn deposit gave investors some confidence on Thursday that a full-scale banking crisis could be averted. Treasury secretary Janet Yellen also told a Senate committee that the banking sector was “sound” and that “Americans can feel confident that their deposits will be there when they need them”.
Traders have a sense that “the problem has been ringfenced”, said Lou Brien, strategist at DRW Trading. “We’re not going to take three steps and a stumble.”
Shares in First Republic, which have fallen 66 per cent in the past week, rose 10 per cent. However, its stock dropped nearly 14 per cent in after-hours trading, after the bank announced it was suspending its dividend “during this period of uncertainty”. S&P Global had downgraded First Republic’s credit rating to junk on Wednesday.
Other regional banks swung to gains in the afternoon, with Western Alliance Bancorp adding 14.1 per cent, and KeyCorp and Zions Bancorp each advancing about 4.5 per cent. Large tech companies such as Alphabet, Amazon, Meta and Microsoft all gained more than 3.5 per cent.
In Europe, the benchmark Stoxx 600 rose 1.4 per cent and FTSE 100 added 0.9 per cent as investors were reassured by comments from the European Central Bank that it was prepared to provide liquidity support to the euro area financial system “if needed”.
That came a day after the Swiss National Bank said it would step in to offer liquidity support to lender Credit Suisse, whose shares rose by a fifth in Zurich. The Euro Stoxx 600 banks index, which contains the region’s biggest lenders, reversed early losses to trade up 1.2 per cent. Société Générale was down 0.2 per cent and Deutsche Bank lost 1.3 per cent.
Equity indices in Europe were modestly higher after the ECB announced its decision to raise interest rates by 50 basis points, at the top end of market expectations. The central bank cautioned that “inflation is projected to remain too high for too long”.
By lifting rates by half a percentage point the ECB has signalled that, for now, concerns about price stability trump those about financial stability, said Carsten Brzeski, head of macro research at ING Bank.
The ECB is “convinced” European banks are healthy and stable, he added, and said raising rates showed it had “other things — inflation — to worry about now”.
The upheaval in the banking industry had prompted speculation that the world’s biggest central banks would be forced to rethink their aggressive interest rate-rising agendas.
Brien of DRW said the ECB’s half-point rate increase washed away traders’ hopes that the Fed would hold rates at next week’s meeting amid turmoil in the banking sector.
It “gave credence to [the idea] that the Fed won’t pause, and raise rates, even by 25 basis points”, he said.
Almost 80 per cent of investors bet on a quarter-point raise next week over a pause, according to Refinitiv. That is a big shift in sentiment from Wednesday, when traders were split 50-50 and expected the federal funds rate to be below 4 per cent by December. Estimates now hover around 4.2 per cent in the last month of the year.
The yield on two-year US Treasury notes, which is closely linked to interest rate expectations, rose 0.28 percentage points to 4.16 per cent. The yield on the 10-year note gained 0.12 percentage points to 3.58 per cent. Yields move inversely to prices.
The inverted yield curve between short and long-dated US government debt — which hit its steepest level since 1981 on March 7 — has flattened sharply since the fall of Silicon Valley Bank. Thursday’s sell-off in Treasurys began to reverse that trend.
Yields on 10-year German Bunds, which on Wednesday had their biggest single-day drop since 1990, rose 0.04 percentage points to 2.28 per cent, while the yield on the two-year notes rose 0.06 percentage points to 2.62 per cent.
Brent crude and its US equivalent West Texas Intermediate rose 1.4 per cent and 1.1 per cent respectively after slumping to their lowest prices in more than a year in the previous session.
Asian equities fell, although analysts at Deutsche Bank said the continent was “avoiding the larger scale declines witnessed in Europe and the US”, after the banking crisis.
Japan’s Topix shed 1.2 per cent, South Korea’s Kospi lost 0.1 per cent and Australia’s S&P/ASX 200 fell 1.5 per cent. Hong Kong’s Hang Seng and China’s CSI 300 dropped 1.7 per cent and 1.2 per cent, respectively.