European stocks extend gains, bonds decline as calm returns

BLOOMBERG

European shares rallied for a second day and US futures pointed to a firmer open for Wall Street as steps to shore up the financial system helped restore confidence.
The Stoxx Europe 600 jumped as much as 1.4%, buoyed by a 3.5% jump in an index of banking shares. Futures for the S&P 500 climbed after a report that US officials are studying ways to temporarily guarantee all bank deposits lifted the underlying gauge.
In premarket US trading, First Republic Bank rose as much as 20% after a proposal from JPMorgan to help the struggling lender, while shares in other regional lenders also edged higher.
Investors are tiptoeing back into riskier assets, reversing the knee-jerk selloff early March 20 that followed a government-brokered takeover of Credit Suisse Group AG by Swiss rival UBS Group AG. Banks’ Additional Tier 1 bonds rebounded in Europe and Asia after euro-zone and UK regulators gave reassurances on the risky debt category, which seized up after Credit Suisse shareholders took precedence over the holders of over $16 billion of the AT1s.
“About 10 days ago we had a series of risks emerge and now one by one, those tail risks are diminishing,” said Erick Muller, head of investment strategy at asset manager Muzinich & Co Ltd. “It seems like everything has been put in place to resolve any liquidity issues — which is reassuring.”
The improving market sentiment dented government bonds, with 10-year Treasury yields rising around four basis points, while the policy-sensitive two-year US Treasury yield climbs14 basis-points. The dollar was steady after a three-day losing streak that sent a measure of the greenback’s strength to the lowest in a month.
Appetite for risk is also being fuelled by expectations that the Federal Reserve may adopt a more cautious policy approach when it decides on interest rates on Wednesday.
Money markets are wagering on a hike of around a quarter-point as the cracks that emerged in the global banking industry discourage more aggressive tightening. Swap traders now see the Fed’s benchmark rate ending the year around 4%, while two weeks ago investors were betting on rates peaking close to 6%.
“It is possible that some central bankers will see the events as policy finally getting some traction and tightening financial conditions via forcing markets to price in greater credit risk,” Mizuho International Plc strategists including Evelyne Gomez-Liechti wrote in a note. “This would allow central bankers to do a little less with policy rates.”
Elsewhere, Brent crude rose for a second day and gold prices weakened. S&P 500 futures rose 0.5%  in New York and Nasdaq 100 futures rose 0.2%.
While futures on the Dow Jones Industrial Average rose 0.4%, the Stoxx Europe 600 rose 1.4% and the MSCI World index rose 0.3%. S&P 500 futures rose 0.5% and Nasdaq 100 futures rose 0.2%. While the MSCI Asia Pacific Index rose 0.5%, the MSCI Emerging Markets Index also gains 0.9%. The Bloomberg Dollar Spot Index was little changed and the euro rose 0.2% to $1.0739.
While British pound fell 0.2% to $1.2248, the Japanese yen fell 0.6% to 132.13 per dollar and the offshore yuan was little changed at 6.8699 per dollar. The yield on 10-year Treasuries advanced three basis points to 3.51% and Germany’s 10-year yield advanced seven basis points to 2.20%.