(US Credit Default Swaps Updates, Debt Ceiling Commentary)
By Naomi Rovnick
LONDON, April 26 (Reuters) – Global stock markets moved in opposite directions on Wednesday as European investors reacted to strains in the US banking sector, but Wall Street futures rose on bullish updates from Microsoft and Google parent company Alphabet.
The European stock index STOXX 600 fell 0.7%, while regional bank shares fell 1.3%.
The broad MSCI index of global equities held steady after Asian markets outside Japan closed 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 they forecast a $100 billion drop in deposits.
But ahead of quarterly earnings from Facebook parent Meta Platforms later in the day, Nasdaq futures in Europe were up 1.2% and S&P 500 futures up 0.4% on Wednesday morning.
Microsoft-listed shares rose 6.6% after quarterly results released after the US close on Tuesday beat analysts’ forecasts. A $70 billion share buyback announced by Google’s parent company Alphabet also seemed to shield Wall Street sentiment from problems in the banking sector.
Financial conditions in the US and Europe have tightened significantly since the Federal Reserve and European Central Bank last year launched their most aggressive rate-hike cycles in decades to fight inflation.
This has shaken confidence in credit-dependent sectors like real estate and raised questions about how global banks will deal with defaults.
US bank deposit flight has prompted investors to downgrade earnings expectations for the global banking sector as banks face pressure to raise interest rates on savings accounts to keep customers’ money.
“Banks around the world want to make sure their deposits are preserved,” said Jason Da Silva, director of global investment strategy at Arbuthnot Latham in London.
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“So the market expects banks’ profits and net interest margins to have probably peaked.”
The benchmark S&P 500 and Nasdaq indices both fell sharply on Tuesday after weak consumer confidence data, while bonds rallied and interest rate futures markets priced in a higher likelihood of Fed cuts later in the year.
US 10-year yields fell nearly 12 basis points (bps) on Tuesday, the sharpest drop in more than a month, while in Europe they stabilized about 2 basis points higher at 3.398% on Wednesday morning. Germany’s 10-year yield slipped 2 basis points to 2.375% after falling 11 basis points in the previous session.
The outlook for bond markets is complicated as the cost of insuring against a US government default rose further on Wednesday after Treasury Secretary Janet Yellen warned that a failure by Congress to raise the debt ceiling would trigger an economic catastrophe would.
Spreads on five-year US credit default swaps widened to 62 basis points, the highest since 2011.
“The likelihood of a US default remains very, very low,” said Guy Miller, Zurich Insurance Group’s chief market strategist. “However, all it takes is the probabilities to go above zero and it becomes a real problem from an investor’s perspective.”
The US dollar index slipped 0.3% on Wednesday. The euro rose 0.5% to $1.103. Gold was just under $2,000 an ounce.
The yen was stable at 133.6 per dollar ahead of this week’s Bank of Japan meeting as markets await cues from incoming governor Kazuo Ueda on whether he might end the policy that has depressed domestic bond yields and the yen.
Brent crude futures fluctuated at $81.38 a barrel after falling nearly 4% overnight on risk-off sentiment.
(Reporting by Naomi Rovnick. Additional reporting by Tom Westbrook and Dhara Ransinghe. Editing by Sam Holmes, Bernadette Baum and Toby Chopra)
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