- Asian stock markets:
- Nikkei banks, S&P 500 futures flat
- Market favors Fed’s 25bp hike, misguided
- Euro holds gains after German bond yields lift
SYDNEY, March 22 (Reuters) – Asian stocks edged cautiously higher on Wednesday on hopes of avoiding a global banking crisis amid uncertainty over the outlook for U.S. interest rates as the Federal Reserve holds a high-stakes meeting on policy.
US Treasury Secretary Janet Yellen’s efforts to calm nerves seemed to have bank stocks rallying overnight. Government officials are also mulling increasing the deposit insurance limit, although there is still no agreement on this.
Shares of First Republic Bank ( FRC.N ) rose on suggestions that the government could be involved in a bailout deal, possibly to the detriment of shareholders, as strains among U.S. regional banks became more apparent.
The unrest left both S&P 500 futures and Nasdaq futures unchanged. EUROSTOXX 50 futures rose 0.2%, while FTSE futures rose 0.1%.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) added 1.3%, while Chinese blue chips (.CSI300) added 0.3%. Japan’s Nikkei (.N225) rose 2.0% as beaten-down banking stocks rebounded.
An even more fragile mood was evident in the latest BofA survey of global fund managers, which found pessimism at its worst in 20 years, amid fears of financial risk and an exit from bank stocks.
All of this puts the central bank in a difficult position as it decides whether to raise interest rates later today.
Goldman Sachs, for one, argues that bank pressures will result in a tightening of lending, which essentially equates to higher interest rates, so a pause would be warranted.
“The historical record suggests that during times of financial stress the FOMC tends to avoid tightening monetary policy and prefers to wait until the extent of the problem becomes clear unless it believes other policy tools will successfully contain financial stability risks,” notes Goldman. .
Analysts at JP Morgan, on the other hand, sided with the majority and flagged a 25 basis point hike, as postponing a move until May would threaten the central bank’s inflation-fighting credibility.
They note that the central bank could further soften its forward guidance by dropping reference to “ongoing hikes”, as the European Central Bank did last week.
QT and DOT plots
An additional issue is whether the central bank temporarily stops selling its Treasury debt, known as quantitative tightening, and what Fed members do with dot-plot projections of future rate hikes.
The latter will be an important focus since the market is everywhere from a policy perspective.
Even pricing in the risk of a rate cut last week, futures now represent an 86% chance of a quarter-point rise to 4.75-5.0%. Again, two weeks ago the market was betting on a half-point rise.
Investors returned to expecting a further hike in May, but saw some chance of a cut in early July and rates at 4.25-4.50% by the end of the year.
How Fed Chairman Jerome Powell navigates all this at his 1830 GMT news conference could well determine the course of markets for the rest of the week.
Bond investors hope he can inspire some calm given the wild volatility of recent days. Two-year Treasury yields hovered at 4.13% after a significant round trip from 5.085% to 3.635% in nine sessions.
European bonds are along for the ride. Germany’s two-year yield overnight posted its biggest daily rise since 2008 as markets priced in more ECB hikes.
That jump helped push the euro to a five-week high of $1.0789 overnight, and it was last firm at $1.0770.
The dollar went the other way to 132.40 against the yen, where yields are still tightly controlled by the Bank of Japan. Demand for yen protection pushed the dollar down to 130.55 at the start of the week.
Among commodities, a slight improvement in risk sentiment saw gold settle at $1,939 an ounce, down from $2,009 on Monday.
Oil prices fell after an industry report showed U.S. crude inventories rose unexpectedly last week, a sign of weakening fuel demand.
Brent was down 41 cents at $74.91 a barrel, while U.S. crude was down 40 cents at $69.27.
Reporting by Wayne Cole; Editing by Stephen Coates and Lincoln Feist.
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