European stocks rise with US futures as calm returns

Traders tiptoed back to risk markets Tuesday as steps to shore up the financial system helped restore confidence.

The Stoxx Europe 600 jumped 0.8 per cent at the open, led by a measure of banking shares surging almost 2 per cent. Futures for the S&P 500 rose slightly following a 0.9 per cent advance on Monday in the underlying gauge on reports US officials are studying ways to temporarily guarantee all bank deposits if the current financial turbulence spreads.

Additional Tier 1 bonds issued by Asian banks rebounded, lifting the region’s stocks. The market for this riskier category of debt seized up on Monday when the rescue of Credit Suisse Group wiped out its AT1 bonds.

London stocks opened higher on Tuesday as lenders rose after fears of a banking crisis appeared to ease, with the blue-chip FTSE 100 advancing 0.8 per cent by 0812 GMT, extending gains after rising nearly 1% on Monday.

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Fears of a global banking meltdown looked to ease after Swiss lender UBS agreed to buy its beleaguered rival Credit Suisse for $3.23 billion over the weekend.

British banks climbed 1.0% in early trading, with Barclays among the top gainers, last up 2.5%.

Weakness in the pound also aided the exporter-heavy FTSE 100, while the more domestically-focussed FTSE 250 midcap index added 0.9%.

Among individual stocks, home improvement retailer Kingfisher rose 1.3% after reporting its full-year earnings.

Appetite for risk is also being fuelled by expectations that the Federal Reserve may adopt a more cautious policy approach when it decides on interest rates on Wednesday.

“It is possible that some central bankers will see recent events as policy finally getting some traction and tightening financial conditions via forcing markets to price in greater credit risk,” Mizuho International strategists including Evelyne Gomez-Liechti wrote in a note. “This would allow central bankers to do a little less with policy rates.”

Fed bets are settling around a quarter-point hike as cracks in the global banking industry are seen discouraging more aggressive tightening. The policy-sensitive two-year US Treasury yield ended Monday 14 basis points higher, just below 4 per cent. That’s also the level where swap traders currently see the Fed’s benchmark rate ending the year — a whole percentage point below the central bank’s own estimate in December.

Just a couple of weeks ago, investors were betting the Fed would raise rates close to 6 per cent and that the European Central Bank would hike past 4 per cent. Now markets imply the tightening cycles are almost over and wager on multiple rate cuts in the US by year-end.

“Further rate hikes are no longer warranted, in our opinion,” Ed Yardeni, president of Yardeni Research Inc., wrote in a note. Fed Chair Jerome Powell will have to acknowledge that “the crisis confirms that interest rates are sufficiently restrictive and that financial conditions are rapidly getting tighter,” he said.

The dollar ticked higher and was set to end a three-day losing streak, which sent a measure of the greenback’s strength to the lowest in a month on Monday.

Elsewhere, oil fell after a turbulent session, even as a calmer tone returned to the market. Gold fell. - Bloomberg, Reuters