European bank rally eases ahead of ECB rate decision

A rally in European bank stocks slowed by mid-morning on Thursday as investors’ turned cautious ahead of a closely watched decision on eurozone interest rates.

Shares in European banks rebounded after a punishing session on Wednesday as investors welcomed the news that the Swiss National Bank would step in to offer liquidity support to Credit Suisse.

The Swiss lender’s shares soared by a fifth but had halved their initial gains. The Euro Stoxx 600 banks index, which contains the region’s biggest lenders, was 1.5 per cent higher and had pared earlier gains. Société Générale was up 0.6 per cent and Commerzbank rose 3.1 per cent.

The region-wide Stoxx 600 rose 0.4 per cent, while Germany’s Dax index and France’s Cac 40 climbed 0.8 per cent. The UK’s FTSE 100 gained 0.9 per cent.

Investors turned cautious on banks and sovereign debt ahead of the European Central Bank meeting on Thursday after the upheaval in the banking industry prompted speculation that the world’s biggest central banks would be forced to rethink their aggressive interest rate rising agendas. Investors are uncertain as to whether the ECB will raise borrowing costs by a quarter or a half percentage point.

Yields on 10-year German Bunds, which on Wednesday saw their biggest single-day drop since 1990, rose 0.16 percentage points to 2.28 per cent, while two-year notes gained 0.22 percentage points to 2.6 per cent. Yields move inversely to prices.

“[It] looks as though a meaningful increase in market volatility has led investors to doubt the ability of the ECB and Bank of England to raise rates much further,” said Daniel Vaun, credit trading director at HSBC. “Given the recent solid data on activity and wages, we still expect both banks to press ahead with rate hikes in March. However, financial stability considerations reinforced our view that the end of the tightening cycle could be close.”

Futures contracts tracking the blue-chip S&P 500 and Nasdaq Composite fell 0.1 and rose 0.3 per cent respectively. On Wednesday, the S&P 500 closed down 0.7 per cent, while the Nasdaq Composite finished flat.

“If you step back it was only a matter of time before [central bank] tightening would create stress in the system. Unfortunately, that stress has arrived in the banking system, arguably the worst place because the ramifications are potentially unlimited,” said John Porter of Newton Investment Management. “I wouldn’t rule it [systemic issues] out, but the moves of the Swiss National Bank and Fed over the weekend have reduced the odds for now.”

The yield on two-year US Treasury notes, which is closely linked to interest rate expectations, rose 0.03 percentage points to 4 per cent. The yield on the 10-year note rose 0.01 percentage points at 3.5 per cent.

Asian equities fell, although analysts at Deutsche Bank said the continent was “avoiding the larger scale declines witnessed in Europe and the US,” after the banking crisis.

Japan’s Topix shed 1.2 per cent, South Korea’s Kospi lost 0.1 per cent and Australia’s S&P/ASX 200 fell 1.5 per cent. Hong Kong’s Hang Seng and China’s CSI 300 dropped 1.7 per cent and 1.2 per cent, respectively.

Shares of Japanese banks resumed a sell-off, with the Topix Banks index down 3.3 per cent. Regional lenders Tochigi Bank and Keiyo Bank were hit the hardest, losing 4 per cent and 3.7 per cent, respectively.

In currency markets, the dollar index, which measures the greenback against a basket of six peer currencies, fell 0.2 per cent. The euro rose 0.4 per cent against the dollar, and sterling gained 0.1 per cent after the spring Budget in which chancellor Jeremy Hunt extended energy bill support and the Office for Budget Responsibility predicted the UK would avoid a technical recession.

Brent crude and WTI, the US equivalent, rose 1 per cent, after collapsing to $73.69 and $67.61 a barrel respectively on Wednesday, their lowest level since December 2021.