Asian markets take breather as rate hike fears ease

Sydney – Asian markets extended a risk rally on Wall Street on Friday to end a tumultuous week that saw a brewing banking crisis send bond yields plunging while market participants sharply lowered expectations of future interest rate hikes in Western economies.

The optimism is set to spill over to Europe, with pan-region Euro Stoxx 50 futures up 0.6%. S&P 500 futures rose 0.1% while Nasdaq futures gained 0.2%.

Overnight, the European Central Bank (ECB) delivered an inflation-fighting 50 basis point rate hike in line with oft-repeated guidance, with sentiment buttressed by the Swiss National Bank’s massive support for Credit Suisse Group, which sent the troubled lender’s shares 20% higher.

Further helping sentiment, as many as 11 US banks including JPMorgan Chase & Co will deposit as much as $30bn into First Republic Bank.

In an indicator that not all worries have gone away, the bank’s shares, which had closed 10% higher after a volatile day that saw trading halted 17 times, slumped 17% in aftermarket trading.

Also, data showed overnight that banks sought record amounts of emergency liquidity from the Federal Reserve over recent days, underscoring the scale of stress in the financial system.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan surged 1.6% on Friday, helping reverse earlier losses to be up 0.7% on the week. Japan’s Nikkei climbed 1.2%.

China’s bluechips jumped 1.3%% and Hong Kong’s Hang Seng index rose 1.8%, after data showed that housing prices in China eked out a more decisive gain in February, confirming an economic recovery.

Meanwhile, global central bankers on Thursday introduced what market watchers interpreted as an emerging effort to firewall the rate increases needed to fight inflation from separate efforts to calm concern about financial stability.

After hiking as indicated, the ECB refrained from providing guidance on future rate hikes. Euribor futures have fully priced in a quarter-point hike to 3.25% at the ECB’s next policy meeting and the possibility of another.

Goldman Sachs now sees rates peaking at 3.5%, compared with a previous forecast of 3.75%.

Markets are also back to overwhelmingly pricing in another 25 basis point hike from the US Federal Reserve at its meeting next week, though there is a 20% chance of the Fed pausing instead.

“Headlines screaming that the US has seen the biggest bank collapse since 2008 naturally engender fears of a rerun of the GFC [global financial crisis]. However, the situation today is radically different to 2008,” said Shane Oliver, chief economist at AMP Bank.

“Whether it’s the sort of crisis that in the past has ended and then reversed Fed monetary tightening is still unclear.”

Two-year Treasury yields continued to climb on Friday and were last up five basis points to 4.176%, pulling away from a six-month low of 3.720% touched earlier this week. Yields were, however, headed for a weekly decline of 41 basis points, the steepest since February 2020 when markets were thrown into chaos by Covid-19 fear.

Ten-year yields were mostly steady at 3.56% and were set for a weekly decline of 13 basis points.

The US dollar reversed some of its safe-harbour flows, with the dollar index last down 0.3% to 104.4.

The Japanese yen gained 0.6% to 132.93/$ while the euro rose 0.4% to $1.0647.

Officials from Japan’s ministry of finance, Financial Services Agency and Bank of Japan were to meet to discuss financial market developments.

“The past week has provided an unwelcome reminder of the inherent fragility of banking systems,” said analysts at Capital Economics in a note to client.

“There is still a great deal of uncertainty. The key question is whether this episode proves another relatively brief period of volatility that soon dies down, or the first tremors of a major banking crisis. At this stage, the answer is unknowable.”

Oil prices reversed earlier losses to be up 1%, though they were headed for a 10% fall for the week. US crude rose 1.0% at $69.06 a barrel, while Brent crude jumped by 1% to $75.5 per barrel.

Gold was slightly higher. Spot gold traded at $1930.03/oz, heading for a weekly gain of 3.3%.