U.S. stock-index futures opened with modest gains Sunday evening as investors assessed a historic deal to rescue troubled Swiss lender Credit Suisse, the latest maneuver by authorities attempting to prevent a deeper loss of confidence in the global banking system.
Swiss bank UBS Group UBS, -5.50% agreed to buy rival Credit Suisse CS, -6.94% CSGN, -8.01% for more than $ 3 billion, a substantial discount to its Friday closing price, in a deal shepherded by Swiss regulators and closely watched by monetary and economic policy makers around the world.
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Also Sunday, the Federal Reserve and five other major central banks announced they were taking steps to ensure that U.S. dollars remained readily accessible throughout the global financial system.
Futures on the Dow Jones Industrial Average YM00, -1.07% rose about 100 points, or 0.3%, while futures on the S&P 500 ES00, -0.81% and Nasdaq-100 NQ00, -0.40% were also up 0.3%,
Oil futures ticked higher after suffering their worst week of 2023 and ending Friday at their lowest since December 2021, with analysts tying the plunge largely to rising recession fears. April West Texas Intermediate crude CLJ23, -3.24% rose 0.3% to $ 66.96 a barrel on the New York Mercantile Exchange, while May Brent crude BRN00, -3.18%, the global benchmark, ticked up 0.4% to $ 73.25 a barrel on ICE Futures Europe.
The positive initial tone in markets late Sunday was reflected in a weaker tone for the Japanese yen, which has seen haven-related support this month on rising banking worries. The U.S. dollar was up 0.3% versus the Japanese currency USDJPY, -0.51% at 132.18 yen. The ICE U.S. Dollar Index DXY, +0.20%, a measure of the currency against a basket of six major rivals, was up 0.1%.
Futures on U.S. Treasurys TY00, +0.47%, which also tend to serve as a haven during periods of crisis, were slightly lower. Treasurys rose sharply last week, dragging down yields, which move opposite to price, in volatile trading.
Read: Why bond-market volatility is at its highest since the 2008 financial crisis amid rolling fallout from banks
Credit Suisse’s 167-year run came to an end after a collapse in the value of its shares and bonds last week. Economists, investors and authorities worried that a collapse by Credit Suisse could amplify contagion fears in the global banking system after the demise earlier this month of California’s Silicon Valley Bank, or SVB.
Economists expect U.S. banks to significantly tighten lending standards in response to the upheaval, raising the odds of the economy falling into recession.
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As a result, fed-funds futures traders abandon expectations for a return to a supersized 50-basis-point, or half-percentage-point, rise in the Fed’s benchmark interest rate when policy makers complete a two-day meeting on Wednesday. The market at the end of last week showed traders saw a nearly 75% chance of a 25-basis-point hike, and a roughly 25% chance the Fed would hold rates unchanged.
Traders also priced in the potential for significant rate cuts by the end of the year, signaling rising recession expectations. Those shifting expectations helped drive the Treasury rally, particularly for the policy-sensitive 2-year note TMUBMUSD02Y, 3.703%.
Analysts said the Fed may be reluctant to hold off on a rate hike this week given still-elevated inflation readings and data so far that that shows the job market remains tight. Some economists see the Fed echoing the European Central Bank’s lead from last week, when it followed through with an earlier pledge to hike rates by 50 basis points while making clear that further rate moves would depend on future developments and data.
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“While the Fed is obviously wary of contagion risks, it still views the banking sector as being well-capitalized, and it will want to stress that the inflation battle is not won, and it remains too high, so a 25-bps hike seems very likely, though like the ECB it will likely stress a high level of uncertainty, and offer no guidance, and emphasize data and financial conditions dependency,” said Marc Ostwald, London-based chief economist and global strategist at ADM Investor Services, in a note.
Despite efforts by the Fed and other U.S. regulators to ringfence SVB and a pair of other collapsed banks while moving to backstop deposits, other regional banks have faced significant pressure. While all depositors at those banks were made whole, calls have increased for the U.S. to formally remove a $ 250,000 cap on insured deposits.
Meanwhile, First Republic Bank FRC, -32.80% saw its credit rating downgraded further into junk territory by S&P Global Ratings, news reports said. The ratings firm cut the bank’s credit rating three notches to B-plus from BB-plus and warned further downgrades were possible, according to Reuters.
First Republic has been a top concern for investors and regulators following the collapse of SVB. Last week a group of 11 large banks agreed to provide a combined $ 30 billion in deposits to First Republic in an effort to shore up confidence in the lender. Shares of First Republic have plunged more than 80% so far in March.
U.S. stocks ended lower Friday amid banking sector fears, with the Dow DJIA, -1.19% booking back-to-back weekly losses.
The S&P 500 SPX, -1.10% rose 1.4% last week, while the technology-heavy Nasdaq Composite COMP, -0.74% climbed 4.4% in its biggest weekly percentage gain since January, according to Dow Jones Market Data.