European equities traded lower by lunchtime on Thursday and the dollar recovered some of its earlier losses, as central banks pressed on with their policies to raise interest rates in spite of investor nerves over the health of the banking sector.
The region-wide Stoxx 600 fell 0.7 per cent, with Germany’s Dax 0.6 per cent lower and the CAC 40 in Paris 0.4 per cent weaker. London’s FTSE 100 lost 0.9 per cent.
Late on Wednesday the US Federal Reserve proceeded with the 25 basis point interest rate increase markets expected, but signalled that its policy of further rate rises to curb inflation may be nearing its peak.
On Thursday the Bank of England raised its benchmark interest rate by 25 basis points, as expected. That followed the Swiss National Bank making a 50-point rise despite the turmoil over Credit Suisse, one of its biggest financial institutions. The Norwegian central bank also increased its base rate, by 25 basis points to 3 per cent.
However, traders are split on a statement from the Fed that omitted previous references to the need for “ongoing” rate rises. Some investors took it as a signal that the Fed was close to the end of its tightening cycle. A majority of investors using the swaps market are pricing in no change at the next meeting in May. The dollar rose 0.1 per cent against a basket of other currencies.
Futures tracking the S&P 500 and Nasdaq rose 0.6 per cent and 1 per cent respectively on Thursday.
“The Fed still feels additional tightening may be needed, but downshifted . . . removing the plurality on the amount of tightening remaining,” said Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management.
“Balancing the Fed’s desire to keep its pressure on inflation, and the reality of tightening credit conditions and bank lending appetite, we think the Fed could still deliver one more 25bp hike in May.”
US Treasuries advanced on Thursday, with the yield on the 10-year note falling 0.01 percentage points to 3.48 per cent. The yield on the two-year note, which is more closely linked to short-term interest rate expectations, was flat at 3.98 per cent. Yields move inversely to price.
Sterling rose 0.3 per cent against the dollar after the BoE decision while the yield on two-year gilt contracts were down 0.09 percentage points at 3.4 per cent. The yield on the 10-year note was down 0.03 percentage points to 3.43 per cent.
The Fed was also balancing the role of higher rates on the worst bout of banking turmoil since the financial crisis of 2008. The central bank said the US banking system was “sound and resilient”, but that the extent of the effects of Silicon Valley and Signature Banks’ collapse is still uncertain.
Treasury secretary Janet Yellen spooked markets by ruling out a broad expansion of deposit insurance to protect savers with balances of more than $250,000 in the near term.
The KBW Bank index, which tracks shares in 24 large and midsized banks, fell 4.7 per cent. Shares in the San Francisco-based First Republic, which this week hired advisers to explore options including a sale, fell 15.5 per cent. In Europe the Stoxx 600 banks index fell 2.1 per cent.
“It seems like markets got a bit ahead of themselves in the last few days, after Janet Yellen suggested the Treasury could take similar steps as they took with Silicon Valley Bank and Signature with other banks,” said Andrew Hunter, deputy chief US economist at Capital Economics. “Markets extended that to assume there will be blanket deposit insurance. There have been calls for that, but it was never a serious proposal.”
Equities in Asia declined, with Japan’s Topix shedding 0.3 per cent and Australia’s S&P/ASX 200 dropping 0.7 per cent. Hong Kong’s Hang Seng index added 2.3 per cent while China’s CSI 300 gained 1 per cent and South Korea’s Kospi was up 0.3 per cent.
Banks in turmoil
The global banking system has been rocked by the collapse of Silicon Valley Bank, Signature Bank and the last-minute rescue of Credit Suisse by UBS. Check out the latest analysis and commentary here
Two-year German Bund yields fell 0.08 percentage points to 2.61 per cent and 10-year yields fell 0.06 percentage points to 2.26 per cent.
Oil prices declined as traders digested the Fed increase. West Texas Intermediate, the US marker, shed 0.8 per cent in the morning to trade at $70.36 a barrel, putting it on track to break a three-session winning streak, while international benchmark Brent crude fell 0.6 per cent to $76.23.