Stock Futures Whipsaw; US Yields, Dollar Waver:
- UBS deal to buy Credit Suisse hasn’t quelled banking fears
- Focus on Fed rate decision with bets on 25 bps hike or pause
US and European equity futures wiped out gains and the dollar fluctuated as efforts to safeguard the global banking system failed to soothe market jitters. The two-year Treasury yields retraced an earlier rebound.
Positive early readings on UBS Group AG’s agreement to buy Credit Suisse Group AG and central bank moves to boost dollar liquidity gave way to a more cautious sentiment as the trading day progressed.
Financial stocks slid during Asian trading, led by HSBC Holdings Plc, whose shares dropped more than 6% in Hong Kong on concern over risky bond exposures related to Credit Suisse. The additional tier-1 bonds issued by some banks in the region fell by a record after a Swiss regulator earlier said $17 billion of such AT1s from Credit Suisse would be wiped out.
Equities benchmarks for Hong Kong, Japan and Australia extended declines, pushing an Asian stock gauge to drop as much as 1.4%. Contracts for the S&P 500 gave up all of its gain for Monday after the US index dropped in excess of 1% on Friday, dragged down by the financial sector.
A measure of dollar strength swung between small gains and losses. Currencies including the yen, the Australian and the New Zealand dollars dropped in a choppy trading. The Swiss franc and the euro also fluctuated.
The policy-sensitive two-year Treasury yield, which slumped over 30 basis points on Friday, erased an earlier rise of as much as 18 basis points. Traders are trying to assess the Federal Reserve’s next move amid the recent financial instability and a softer-than-expected reading on inflation expectations.
Much of the debate in markets is now focused on whether the Fed will deliver another quarter-point hike or pause at its March 21-22 meeting. Traders no longer see much chance of a bigger half-point hike that Chair Jerome Powell had put on the table just before concerns about financial stability emerged.
“Our best guess is that the Fed would still like to hike by 25 basis points and try to make it clear to the market that rate hikes are still focused on getting inflation back under control,” Brad Gibson, head of Asia Pacific fixed income at AllianceBernstein L.P., said on Bloomberg Television.
Policymakers are rushing to shore up confidence after the collapse of Silicon Valley Bank and problems at Credit Suisse added to broader concerns over financial stability.
UBS’s government-backed takeover of Credit Suisse seeks to address client outflows and a massive rout in the target’s stock and bonds.
The Fed and five other central banks announced coordinated action to boost liquidity in US dollar swap arrangements to ease strains in the global financial system.
“It’ll take some time to digest the Credit Suisse news,” said Chamath De Silva, senior portfolio manager for BetaShares Holdings. “The broader equity market remains relatively stable, pinned by the competing forces of banking crisis-induced credit contraction and the potential stimulative effects of easier policy.”
Yield on the policy-sensitive three-year Australian bond slipped about 17 basis points to 2.84%, taking it further below the Reserve Bank’s 3.6% cash rate.
Elsewhere in markets, Bitcoin fell slightly from its highest level since June. Oil and gold dropped.
Key events this week:
- ECB President Christine Lagarde appears before European Parliament’s economic committee, Monday
- US existing home sales, Tuesday
- US Treasury Secretary Janet Yellen to appear at Senate subcommittee hearing, Wednesday
- FOMC rate decision, news conference from Chair Jerome Powell, Wednesday
- EIA crude oil inventory report, Wednesday
- Eurozone consumer confidence, Thursday
- BOE interest rate decision, Thursday
- Swiss National Bank rate decision and press conference, Thursday
- US new home sales, initial jobless claims, Thursday
- US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday
- Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
- US durable goods, Friday