Credit Suisse rescue boosts Asian stocks, but traders wary of U.S. rate hikes


21st March 2023 – (Hong Kong) Asian stocks have been lifted from their lows on Tuesday after the Credit Suisse rescue boosted investor confidence, but traders remain wary of U.S. rate hikes. The MSCI’s broadest index of Asia-Pacific shares outside Japan rose by 0.5% in early trading, while the Hang Seng opened 0.7% higher. Australian shares also bounced back 1.3% from Monday’s four-month trough. However, the mood remains fragile, and the stress in markets has left traders wondering whether U.S. rate hikes might be finished.

The Swiss government-backed buyout of Credit Suisse by UBS has cauterised immediate concerns over European financial stability. However, the wipeout of some Credit Suisse bondholders has sent a shockwave through bank debt, with investors on high alert. The writedown of Credit Suisse’s “additional tier 1” debt to zero set off frantic selling of similar debts at other banks because holders were surprised that the long-standing practice of paying creditors before shareholders was not fully followed. That somewhat abated after regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent.

The banking sector’s near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes, says Standard Chartered’s head of G10 FX research, Steve Englander. San Francisco lender First Republic seems to be a case in point. Its share price halved on Monday on worries that $30 billion in deposits posted by bigger banks less than a week earlier would not be enough to shore up its stability. “Globally, I think we’re a long way from being out of the woods on this,” says Sydney-based Jefferies’ banking analyst Brian Johnson. The present stress is set against a backdrop of higher capital costs and declining loan growth.

Central bank meetings in Britain and the United States are scheduled this week, with the Fed first up on Wednesday. U.S. interest rate futures have priced in just one more 25 basis point hike before a series of cuts beginning as soon as June. The CME FedWatch tool shows pricing implying about a 74% chance of a rate hike on Wednesday. “If the (Fed) pauses, the message may be that it sees further hikes as markets settle down. But the reality may be that a March pause effectively ends the hiking cycle if the economy slows,” says Englander.

In foreign exchange markets, the U.S. dollar steadied after slipping overnight. It last bought 131.90 yen and held at US$1.0718 per euro. Bond markets whipsawed overnight as traders sought to figure out what the bank stress means for rates policy. A holiday in Tokyo left Treasuries untraded in Asia. In commodity markets, demand jitters have Brent crude futures pinned below $80 a barrel; they were last at US$73.80. Gold hit a one-year high of US$2,009 an ounce overnight, before easing to US$1,979 on Tuesday.

While the Credit Suisse rescue has provided some relief for investors, the overall market mood remains cautious. With the stress in the banking sector, traders are wondering whether U.S. rate hikes may be coming to an end. This week’s central bank meetings in Britain and the United States will provide some insight into what the future holds.