US stocks rose on Tuesday as investors appeared reassured by efforts to reduce the risk of contagion in the financial system and awaited the Federal Reserve’s next interest rate decision.
The blue-chip S&P 500 index rose 1.3 percent and the tech-heavy Nasdaq Composite climbed 1.6 percent, climbing for a second day.
The KBW Nasdaq Bank index rose 5 percent, while struggling California lender First Republic climbed 29.6 percent after falling nearly in half on Monday.
Banks have stabilized after regulators moved to support lenders caught up in the financial sector turmoil following the collapse of Silicon Valley Bank and two other US lenders this month. US Treasury Secretary Janet Yellen signaled on Tuesday that the government would protect all deposits at smaller US banks if needed.
Sam Gunter, Head of FX Trading at Britannia Global Markets said: “There has been an ongoing sentiment of support for the banking sector, including from , over the past few days [European Central Bank president] Christine Lagarde said they would tackle inflation and financial stability and Janet Yellen showed her support for regional banks.
“That’s why we’re seeing stock markets rallying higher and safe havens like gold and the yen losing ground.”
Interest rate decisions from the US and UK central banks will be the focus of investor attention this week. The turmoil in the global banking sector has eased expectations about the extent of rate hikes to fight inflation.
The Fed’s decision comes after a two-day meeting that began on Tuesday. Futures markets on Wednesday predicted that the US Federal Reserve would hike interest rates by 0.25 percentage points from their current level of between 4.50 percent and 4.75 percent.
Gennadiy Goldberg, US interest rates strategist at TD Securities, said Yellen’s comments protecting regional US banks freed the Fed to focus on cooling inflation through rate hikes, rather than pausing to allay concerns about bank instability.
“If there are more announcements from the Treasury and the government at large, I think that could stabilize the market and actually allow the Fed to tighten policy further,” he said.
“If they stop going up now, it will be quite difficult for them to resume raising rates. . . While hiking 25 [basis points]it almost retains the possibility of further wandering in future meetings.”
The Bank of England meets on Thursday but swap market prices suggest investors are divided between a 0.25 percentage point rise and no change.
“The question now is whether the problems in the banking sector are enough to push the BoE to hold rates,” Bank of America analysts said. “Therefore, greater uncertainty about the economic outlook, along with potentially tighter credit conditions, could push the BoE to hold rates.”
The yield on the two-year government bond, which closely tracks interest rate expectations, rose 0.22 percentage points to 4.17 percent on Tuesday, while the yield on the 10-year note rose 0.11 percentage points to 3.59 percent. Yields move inversely with price.
The two-year Bund yield jumped 0.31 percentage point to 2.63 percent, while the 10-year yield rose 0.2 percentage point to 2.29 percent.
European stocks also added to gains on Tuesday as investors were bolstered by regulatory measures to curb the risk of weak banks contaging the financial system.
The Stoxx Europe 600 Banks Index closed up 3.8 percent after rising 1.2 percent in the previous session.
Broader indices also rose, with the regional Stoxx 600 up 1.3 percent, Germany’s Dax up 1.8 percent, France’s CAC 40 up 1.4 percent and London’s FTSE 100 up 1.8 percent.
Credit Suisse and UBS, which announced plans to merge in a Swiss government-brokered deal on Sunday, rose 7.3 percent and 12.1 percent, respectively.
As part of the merger agreement, an additional $17 billion of Credit Suisse Tier 1 (AT1) bonds were issued.
That sparked a sell-off in AT1 bonds from other financial institutions on Monday, as investors feared bondholders would face bigger losses than Credit Suisse shareholders, who were allotted UBS shares.
“It’s still early days. The first reaction [to the deal] was not positive, but comments from regulators and policymakers seemed fairly well received,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. “We are still in a weaker position but there are tentative signs that things are not getting worse.”
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In Asia, Hong Kong’s Hang Seng Index closed 1.4 percent and China’s CSI 300 rose 1.1 percent. South Korea’s Kospi gained 0.4 percent. Japanese markets were closed for the vernal equinox holiday.
Asian bank stocks also rose, with the Hang Seng Finance Index gaining 1.4 percent. HSBC and Standard Chartered were up 1.7 percent and 4 percent, respectively.
Spot gold prices fell 2 percent to trade at $1,939.50 an ounce after briefly hitting their highest level since March 2022 on Monday.
Oil prices continued to rise after rising more than 1 percent on Monday. International benchmark Brent crude and US equivalent WTI gained 2.1 and 2.5 percent, respectively.
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