Fresh turmoil at Credit Suisse Group AG roiled European bank shares and dented sentiment in the US futures market as investors remain on edge after last week’s regional-bank failures. Treasuries turned higher on haven demand.
Europe’s Stoxx 600 equity benchmark fell 2%, with a gauge of banks plunging more than 5%. Shares in Credit Suisse slumped for an eighth straight session after a top shareholder ruled out more assistance, while the cost of default insurance on the Swiss lender’s short-term debt approached distressed levels.
Contracts on the S&P 500 and Nasdaq 100 fluctuated before turning lower as a rebound in the regional banks petered out in the premarket trading. The 10-year Treasury yield fell 12 basis points. A gauge of dollar strength jumps after four days of declines.
Renewed jitters in the banking sector is complicating the task for policy makers still facing inflation pressures while having to ensure stability of the financial system. Swaps pricing is back to positioning for the Federal Reserve to lift rates by a quarter percentage point next week after the odds of an increase had slipped to nearly 50-50 on March 13. The European Central Bank is seen tightening by 50 basis points on Thursday.
“Central banks are likely to be more cautious as they monitor the tightening in credit conditions,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “However, one major difference with previous banking crisis episodes is a more resilient macro backdrop including persistent inflationary pressures. This will make for a difficult trade-off between inflation and financial stability risks, with central banks trying to resist rate cuts for as long as possible.”
The two-year Treasury yield — the most sensitive to rate moves — has fluctuated wildly since dipping below 4% on March 13 for the first time since September. Just a week ago, it stood above 5% after Fed Chair Jerome Powell signaled higher rates for longer.
Stocks have been on a similar roller-coaster ride. Futures indicated 1.7% surge wouldn’t extend as investors continued to be on edge over turmoil in the banking sector. Stocks plunged 4.6% last week, the worst since September. Data on producer prices, manufacturing and retail sales may provide further clues on the outlook for policy.
Remarks from ratings companies on the financial sector underscored that sentiment is likely to remain fragile after the biggest American bank failures since the financial crisis.
Moody’s Investors Service cut its outlook on the sector on the heels of the trio of banking collapses over the past few days. First Republic Bank triggered a volatility halt after S&P Global Ratings placed the company on watch negative.
Traders were also digesting a slew of economic data from China, where retail sales rose as much as estimated while factory output was fractionally lower than projected. The People’s Bank of China added more liquidity than expected while holding a key lending rate unchanged. Rising housing sales provided one clearly positive signal, reflected in a rally in a mainland property index. Elsewhere in markets, oil was little changed close to a three-month low as traders took stock of the outlook for demand.
S&P 500 futures fell 1.2% as of 6:25 am New York time and Nasdaq 100 futures fell 1%. While futures on the Dow Jones Industrial Average fell 1.2%, the Stoxx Europe 600 fell 2.1% and the MSCI World index fell 0.3%. The Bloomberg Dollar Spot Index rose 0.4% and euro fell 0.6%. The British pound fell 0.4% to $1.2109 and Japanese yen rose 0.3% to 133.88 per dollar.