US stocks struggle for direction as investors digest central bank decisions

US equities were mixed on Thursday as investors digested a spate of central bank interest rate rises that have come in spite of recent turbulence in the banking sector.

The blue-chip S&P 500 was 0.2 per cent lower while the tech-heavy Nasdaq Composite gained 0.4 per cent.

Late on Wednesday the US Federal Reserve proceeded with the 0.25 percentage point interest rate increase markets expected, but signalled that its monetary tightening cycle may be nearing the end.

On Thursday, the Bank of England raised its benchmark interest rate by 0.25 percentage points, also anticipated by markets. The Swiss National Bank and Norway’s central bank also increased interest rates on Thursday.

European equities were also mixed. The region-wide Stoxx 600 closed down 0.2 per cent and London’s FTSE 100 lost 0.9 per cent. However, Germany’s Dax was flat and the CAC 40 in Paris finished 0.1 per cent higher.

In its monetary policy statement on Wednesday, the Fed omitted its oft-repeated references to the need for “ongoing” rate rises. Swaps markets are pricing in no change at the next meeting in May, with an outside chance of one more increase.

“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,” said Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management.

US Treasuries gained on Thursday, with the yield on the two-year note, which is closely linked to short-term interest rate expectations, down 0.20 percentage points at 3.77 per cent.

Sterling rose against the dollar to a peak of $1.23 after the BoE decision, its highest point since early February. The yield on two-year gilt contracts was down 0.21 percentage points at 3.25 per cent. The yield on the 10-year note was down 0.09 percentage points to 3.35 per cent.

The central bank has been left balancing higher rates with the looming credit crunch resulting from the worst bout of banking turmoil since the financial crisis of 2008. The Fed said the US banking system was “sound and resilient”, but added that it was not yet clear to what degree the tighter credit conditions likely to stem from the collapse of Silicon Valley bank and Signature Bank would restrict the economy and inflation.

The KBW Bank index, which tracks shares in 24 large and midsized banks, fell 2 per cent, having lost nearly 5 per cent the previous day after US Treasury secretary Janet Yellen ruled out a broad expansion of deposit insurance to protect savers. Shares in the San Francisco-based First Republic, which this week hired advisers to explore options including a sale, fell 8.1 per cent. In Europe the Stoxx 600 banks index fell 2.5 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

“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.”