Broad relief. There’s a sense that we got through the hardest part with Monday’s volatility dialling down. Shares in London, Paris and Frankfurt rallied more than 1 per cent again in early trading on Tuesday. The FTSE 100 pushed up around about 100pts to 7,505 and back above its 200-day moving average. Banking shares were generally higher with gains of around 3-4 per cent for the major players. UBS rose around 4 per cent though Moody’s joined S&P in downgrading the bank’s bonds.
Markets
US stocks rose yesterday with the Dow up 1.2 per cent and the Nasdaq Composite rising 0.4 per cent. The broader S&P 500 rallied 0.9 per cent to 3,951 and moved clear of the 200-day line at 3,930. Ten-year Treasury yields sit at 3.5 per cent, with gold off its one-year high struck amid the worst of the weekend turmoil at $1,966. Crude oil firmed with WTI (May) futures up to $68.49, over $4 above yesterday’s low. The dollar is lower with risk on, DXY futures testing 103. Cable is holding onto 1.22 but off the 1.2280 highs earlier.
While the Swiss were hoping to draw a line under Credit Suisse, over in the US the embattled First Republic Bank was posing more problems as shares slid 47 per cent despite a $30bn deposit from Wall Street. Talk now is of converting this to equity to shore up FRC – sounds like good money after bad – though shares trade up 14 per cent pre-market. The KRE regional banks ETF managed to rise a modest 1 per cent.
To pause or not to pause
Despite the apparent relief, uncertainty is still in charge. What we are seeing is that once events take over, policymakers are left with zero good options. The Federal Reserve faces one of the most difficult decisions in years tomorrow – it can hike, it can pause or even cut. The truth is the Fed is already easing by turning on the liquidity taps – redeeming Treasuries at par etc.
It seems as though the Fed will take the ECB’s cue and raise, though it may refrain from a full 50bps and prefer 25bps. Markets are pricing in a roughly 83 per cent chance it goes for 25bps, with ~17 per cent chance of no hike.
Neil Wilson is chief market analyst at Finalto
