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Europe battles to shake off nagging banking concerns

2023-04-27T09:35:40Z

The dollar remained under pressure and world share markets were trying to stay positive on Thursday, as ongoing rumbles in the U.S. banking system kept investors cautious ahead of a barrage of top-tier European and U.S. data.

London, Paris and Frankfurt stocks nudged into positive territory as reassuring earnings from UK bank Barclays, Germany’s Deutsche Bank and consumer goods giant Unilever added to Facebook owner Meta’s pleasing overnight results.

UniCredit also caused a sigh of relief as it redeemed an ‘AT1’ bond in the market’s first test since Credit Suisse’s collapse saw its AT1s wiped out and raised serious questions about the worth of the bonds as a capital tool more broadly.

AT1 bonds emerged from the financial crisis of 2008 as a way to boost bank capital while shifting the risk of losses away from taxpayers.

Elsewhere the mood was still nervy.

The ‘yield’, or cost of borrowing, on the 1-month Treasury bill headed higher again on concerns the U.S. could hit its self-imposed debt limit in the coming months, while oil traders were licking their wounds after some heavy falls on Wednesday.

In the currency market too the dollar was down for the sixth session in the last seven, although the euro was showing its standalone strength as it approached a record high on a trade-weighted basis.

“European markets are lacklustre if anything,” said CMC Markets senior analyst Michael Hewson.

“We are looking at the earnings numbers and they are not bad really,” he said, referring to the Unilever, Barclays and U.S. tech giants like Meta.

“But markets are just fixated on the banking sector troubles and how many more rate rises we are likely to get from the Federal Reserve and the European Central Bank.”

Nasdaq futures , gained 0.8% after the shares of Facebook owner Meta (META.O) soared 12% in after-hours trading following its earnings beat. Intel (INTC.O) and Amazon (AMZN.O) will both report their results later on Thursday.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) turned around early falls to close 0.2% higher.

Japan’s Nikkei (.N225) broadly matched the gains although Singapore’s Straits Times Index (.STI) fell 0.3%, dragged lower by real estate companies after the government raised taxes on private property purchases.

Chinese tech stocks also dipped after comments from Washington that Chinese cloud computing firms posed a threat to U.S. security.

Wednesday’s Wall Street session had also seen woes of First Republic bank continue, with its shares sinking as much as 41% at one point to leave it valued at about $888 million, a far cry from its peak of more than $40 billion in November 2021.

Investors are waiting to see whether it can find buyers for assets and engineer a rescue. CNBC had reported that U.S. government officials are currently unwilling to intervene.

“First Republic is a bank it would seem to soon be no more. As the bank attempts all manner of rescue strategies it continues to slide relentlessly,” said Clifford Bennett, chief economist at ACY Securities.

“It is a case of the incredible shrinking bank. Until, in the end, it likely just simply ceases to exist.”

First Republic declined to comment on Wednesday’s share price falls.

The Atlanta Federal Reserve’s GDPNow, which tracks how incoming data influences estimated gross domestic product (GDP), had showed that the estimate for the first-quarter growth is now at an annualised 1.1%, sharply down from 2.5% just a week ago.

That suggests there may be a downside risk to U.S. first-quarter GDP data, due later on Thursday. Analysts polled by Reuters tip an expansion rate of 2% although a number of major investment banks remain of the view a recession looms this year.

Fed funds futures are pricing in a chance of about 75% that the Federal Reserve will hike interest rates by 25 basis points (bps) at its May meeting next week.

The euro zone will also publish its first quarterly GDP print on Friday. That will enivitably feed the debate on how much higher the ECB is likely to raise its rates when it meets a day after the Fed in a week’s time.

Germany’s 10-year government bond yield , the euro area’s benchmark, rose 4 basis points to 2.42% after dropping by around 10 bps in the last two sessions.

It was still 35 bps below its highest since July 2011 at 2.77%, hit in early March, and more than 40 bps above its lowest reached in mid-March, when fears that a full-blown banking crisis might be brewing were at their height.

U.S. Treasuries yields moved slightly higher too on Thursday, with the 2-year up 3 basis points to 3.953%, and 10-year up 2 bps to 3.4504%.

“There’s been a bit of a tug-of-war in markets over the last 36 hours,” Deutsche Bank analyst Jim Reid said. “Between the dominance of U.S. tech pulling aggressively on one side against the still shaky foundations of U.S. regional banks on the other”.

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A stock broker sits in front of the share price index DAX graph following the shares of Credit Suisse hit a record low in a rout of European bank stocks, as investor concerns about sector stresses triggered by Silicon Valley Bank’s implosion deepened, at the stock exchange in Frankfurt, Germany, March 16, 2023. REUTERS/Kai Pfaffenbach

Passersby walk past an electric stock quotation board outside a brokerage in Tokyo, Japan, December 30, 2022. REUTERS/Issei Kato
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