SINGAPORE, March 21 (Reuters) – Asian stocks scraped from lows on Tuesday, with the Credit Suisse bailout curbing selling of bank stocks, although sentiment was fragile and tensions in the financial system made traders uncertain, like Federal Reserve policymakers will respond to this week.
The Fed begins a two-day meeting later in the day, and after a few wild sessions, US interest rate futures pricing suggests that a peak in interest rates is either imminent or already in place, with newfound stability concerns pushing inflation-fighting aside.
MSCI’s broadest index of Asia Pacific equities outside of Japan (.MIAPJ0000PUS) rose 0.4%. Australian shares (.AXJO) rose 0.9%, hitting a four-month low, while in Hong Kong, HSBC and Standard Chartered shares each rose more than 1.5% to stabilize after a collapse on Monday.
Japanese markets were closed for a public holiday, leaving Treasuries idle in Asia and facilitating forex trading. S&P 500 futures were flat and European futures were up 0.5%.
The tense calm follows a Swiss government-backed takeover of Credit Suisse by UBS, which appears to have allayed concerns about Europe’s financial stability for now.
But the wiping out of some Credit Suisse bondholders has already sent a shockwave through bank debt, while the speed at which troubles spread from regional US banks to a major systemically important bank in Europe rattled markets.
“While the last global financial crisis spanned 18 months, today’s crisis is only 10 days old and has already resulted in the collapse of some US regional banks and the arranged marriage of UBS and Credit Suisse at 0.06 times book value,” said banking analyst Jonathan Mott at Barrenjoey in Sydney.
“While global regulators are acting at pace, this appears to be a smack-the-mole game.”
San Francisco-based lender First Republic (FRC.N) is shaping up to be the next pressure point. The share price halved on Monday amid concerns that $30 billion in deposits placed by major banks last week would not be enough to shore up its stability.
U.S. officials are exploring ways to temporarily extend Federal Deposit Insurance Corp coverage to all deposits, Bloomberg News reported Monday.
EXTRA TEARS
The dust has also yet to settle on the write-down of Credit Suisse’s Additional Tier 1 debt to zero.
It sparked a frantic sale of similar debt, as holders were surprised that the long-standing practice of paying creditors before shareholders wasn’t fully followed.
That eased somewhat after regulators in Europe and the UK stepped in to reassure investors it wouldn’t set a precedent and prices in Asia stabilized on Tuesday.
“Over the past 24 hours, as more details have emerged, some people are realizing that the initial reaction may not have been the right one,” said Thomas Jacquot, head of research at Sydney-based fixed income brokerage firm FIIG. “You can’t take that as a precedent — that’s an exception. This is (only) a precedent in Switzerland.”
The broader path for rates should become clearer later in the week as the Fed and Bank of England set interest rate levels.
Fed fund futures imply a 1 in 4 chance the Fed will pause on Wednesday, according to CME’s FedWatch tool, while markets are evenly split on the prospect of a UK rate hike.
“The banking sector’s near-death experience over the past two weeks is likely to prompt Fed officials to moderate their stance on the pace of rate hikes,” said Steve Englander, Standard Chartered’s head of G10 FX research.
In FX, the US dollar stabilized after slipping overnight. It last bought 131.30 yen and held at $1.0711 per euro.
In commodity markets, fluctuations in demand have caused Brent crude futures to be pinned below $80 a barrel; they were last at $73.15. Gold hit a high for the year of $2,009 an ounce on Monday before falling to $1,980 on Tuesday.
Reporting by Tom Westbrook; Edited by Bradley Perrett and Jacqueline Wong
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