Asian shares rise amid banking system hopes

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27th March 2023 – (Hong Kong) Asian shares have rallied, followed by U.S. stock futures, as hopes have emerged that authorities are working to ring fence stress in the global banking system. Reports of First Citizens BancShares’ acquisition talks with Silicon Valley Bank from the Federal Deposit Insurance Corp have also helped calm nerves. MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.1%, while Japan’s Nikkei gained 0.1% and South Korea 0.2%. However, trading remains cautious as the cost of insuring against default neared dangerous levels, after shares in Deutsche Bank fell by 8.5% on Friday.

The cost of insuring bonds against default has jumped sharply, along with the credit default swaps (CDS) of many banks. “The current level of credit default swaps for European banks is just a little lower than it was during the height of the European financial crisis in 2013,” warns Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. As a result, if these CDS do not normalise, it is highly likely stock markets may continue to suffer for many days. The jittery mood has also led to depositors fleeing smaller banks for their larger counterparts or money market funds in the U.S..

Minneapolis Fed President, Neel Kashkari, has said that officials are watching very closely to see if the banking stress leads to a credit crunch that could threaten to tip the economy into recession. Kashkari added that this means the Fed is closer to a peak in rates. Markets are already pricing around an 80% chance that rates have already peaked, while a first rate cut is seen as early as July. Fed Governor Philip Jefferson speaks later today, while Fed Vice Chair for Supervision Michael Barr testifies on “Bank Oversight” before the Senate tomorrow.

The drop in yields has been a drag on the dollar, at least against the safe-haven Japanese yen, where it stands at 130.85 yen. The euro has also suffered its own reversal, last at US$1.0767 and well off last week’s US$1.0930 top, amid worries over Deutsche. The drop in yields has combined with the run from risk to burnish gold, which was trading atUS $1,975 an ounce after reaching a high above US$2,009 last week. Meanwhile, oil prices were steadier early Monday but are still nursing losses of almost 10% for the month as worries about global growth undermine commodities in general.