Asian and European markets bounced Tuesday from the previous day’s rout, with lenders boosted by easing concerns of another financial crisis, while focus turned to the Federal Reserve’s policy decision later in the week.
The panic that characterised trade over the past 11 days appeared to have faded after authorities in leading economies pledged support for depositors and troubled banks following the collapse of Silicon Valley Bank and Signature Bank in the United States.
Still, the takeover of troubled Credit Suisse by UBS for $3.25 billion fanned concerns about what could be next on the chopping block, and analysts warned it was too early to say that the crisis was over. The move to save Credit Suisse aimed to prevent a wider crisis as it is among the 30 global banks considered ‘too big to fail’.
All three main indexes on Wall Street ended on the front foot -- with the Dow more than one per cent up -- while European markets were also comfortably higher, helped by promises of support from the Fed and other central banks as well as the saving of Credit Suisse.
However, embattled First Republic Bank collapsed almost 50 per cent, despite a coalition of US lenders saying they would inject $30 billion into it.
But CMC Markets analyst Michael Hewson said, “The problems being felt in the US banking system were being shrugged off with further weakness in First Republic Bank being treated as a localised difficulty, rather than anything more systemic”.
There was also less concern over high-risk debt markets as holders of such bonds at Credit Suisse, known as AT1s, will lose $17.3 billion after authorities required that they be written off.
The assets, also known as ‘CoCo’ bonds, tumbled Monday as they were wiped out in the deal despite equity investors getting some of their cash back. That led traders to question the usual hierarchy of bonds over stocks.
However, European officials on Monday reiterated that the usual structure remained the same for claims.
Before the crisis kicked off, expectations were for borrowing costs to go as high as six per cent, but now forecasts are for them to end at around four per cent.