US futures steady, bonds gain as bank angst lingers

BLOOMBERG

US equity-index futures were steady on Friday and Treasuries gained, capping a tumultuous week for global markets amid lingering concern that the financial turmoil which has roiled bonds and stocks is not over.
Contracts on the S&P 500 fluctuated after the index rallied 1.8% as larger banks threw a lifeline to First Republic Bank, the latest US lender to signal stress. That didn’t stop shares in First Republic from sliding in pre-market trading, however. On the plus side, FedEx Corp. jumped more than 10% after the courier boosted its profit outlook.
Futures on the Nasdaq 100 were flat as the rates-sensitive gauge heads for its best week since November amid expectations the Federal Reserve will temper its tightening path. The 10-year Treasury yield dipped and a gauge of the dollar declined.
Banks including JPMorgan Chase & Co. and Citigroup Inc. banded together in a show of support for First Republic. While the rescue attempt helped boost sentiment, billionaire investor Bill Ackman was among those questioning whether it would be enough to halt the crisis. Meanwhile, US banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week, a sign of escalated funding strains in the aftermath of Silicon Valley Bank’s failure.
“We do not expect a full-blown financial crisis, but one must not dismiss the underlying dynamics,” said Karsten Junius, the chief economist at Bank J Safra Sarasin AG. “Financial conditions will most likely tighten further and increase recession risks. We therefore advocate a defensive positioning with regard to risk assets and a tactically cautious stance on the banking sector, even though the constructive case for banks remains intact over the medium to longer term.”
The Stoxx Europe 600 index pared an advance. A gauge of European banking stocks is heading for a drop of almost 9% this week as yet another early rally lost steam on Friday. Shares in the troubled Swiss lender Credit Suisse Group AG resumed a decline as the idea of a forced combination with a larger rival UBS Group AG was shot down. The stock had rallied almost 20% after the Swiss central bank stepped in with support. Bonds across Europe gained, with Germany’s 10-year yield down four basis points.
Markets were also digesting a 50 basis points rate hike by the European Central Bank. By making it clear that stress points in the banking industry — as well as economic data — will guide future rate decisions, ECB Chief Christine Lagarde paved the way for bond-market gyrations to remain elevated for the remainder of the year as traders try to figure out when the hiking cycle will end.
US two-year yields have whipsawed at least 20 basis points a day for six straight sessions through March 16 as traders re-calibrated rate-hike bets. Market pricing for the Fed’s March 21-22 meeting has lurched between another quarter-point hike, and the first rate pause in more than a year. US overnight indexed swaps are now pricing for an 80% probability of a quarter-percentage point Fed rate hike next week.
BlackRock Investment Institute does not expect cracks in the financial sector to deter central banks from raising rates further to contain inflation. It expects both the ECB and the Fed to “go as far as possible to distinguish their inflation fighting campaigns from measures to deal with bank troubles and safeguard the financial system,” a team of BlackRock analysts wrote in a note.
Elsewhere, equity indexes rose in Hong Kong, Japan and Australia gained amid a rebound in banking shares. Even so, an Asia equity gauge was set for a second weekly loss after the recent banking-sector turbulence.
In China, traders were able to access widely used bond price feeds again after an abrupt suspension of the data earlier in the week roiled the $21 trillion market.