Scramble for safety subsides as markets digest Credit Suisse rescue
Bank shares rally after emergency takeover of Credit Suisse
Credit Suisse shares slump over 55%
European banks claw back ground after initial 5% tumble
Government bond yields rise in cautious bid for risk
Wall Street gains, First Republic Bank tumbles
By Koh Gui Qing and Marc Jones
NEW YORK/LONDON, March 20 (Reuters) -Bank stocks rallied on Monday and a cross-asset scramble for safety abated, as investors heaved a tentative sigh of relief that a historic weekend rescue of financial heavyweight Credit Suisse is containing the banking crisis for now.
Sunday saw the most dramatic state intervention since the 2008 global financial crisis, with UBS buying Credit Suisse for 3 billion francs ($3.2 billion) in a takeover backstopped by unlimited funding pledges from the world's top central banks.
The speedy orchestration of Credit Suisse's takeover was received by investors as an acceptable measure to stem contagion, but fears that other struggling banks might teeter next kept markets on edge.
"While the Credit Suisse rescue might draw a line under that particular institution’s problems, it is clear that confidence in the financial sector overall is still extremely fragile," said Vicky Redwood, a senior economic advisor at Capital Economics.
Indeed, shares in First Republic Bank FRC.N, the lender drawing the most concern from U.S. investors right now, bucked gains on Wall Street and cratered 33.5%, after S&P Global downgraded its credit ratings deeper into junk on Sunday.
The Dow Jones Industrial Average .DJI jumped 1.2%, the .SPX rose 0.9%, and the Nasdaq Composite Index .IXIC gained 0.2%.
The KBW Bank Index .BKX, a proxy for banks, jumped 1.8%.
The latest banking crisis started after two U.S. lenders, Silicon Valley Bank and Signature Bank, collapsed this month, while First Republic Bank has so far failed to shore up investor confidence despite having received emergency support.
Losses in European bank shares .SX7P also recovered, climbing 1.3% after initially dropping 6%, as investors digested the support efforts and the pace at which they had come. Credit Suisse's own shares CSGN.S slumped 55.7%and those of its acquirer UBS UBSG.S jumped 1.3% after tumbling nearly 13% earlier in the session. .EU
The broader European STOXX 600 index .STOXX also managed to make it into positive territory to be up 0.98%.
"Credit Suisse is our Lehman moment in Europe, but we recognise that and we are not going to make the same mistake," Close Brothers Asset Management Chief Investment Officer Robert Alster said of the speedy action by authorities over the weekend.
He said the European Central Bank, Bank of England and others would be well aware "of the next gazelles in the chain that the lions will be hunting" - meaning other large banks with investment banking arms such as Deutsche Bank, BNP in France or Barclays in the UK - and will step in with support if needed.
"There is a lot of firepower from the authorities to counter what is the steadily eroding loss of confidence," Alster said.
Gains in stocks were accompanied by higher Treasury yields, as bond investors weighed the chances of whether the Federal Reserve will skip raising interest rates when it meets this week given the upheaval among banks.
Fed funds futures show a 26.9% probability of the Fed holding its overnight rate at a current 4.5%-4.75% when policymakers conclude a two-day meeting on Wednesday, CME's FedWatch Tool shows.
The yield on benchmark 10-year Treasury notes US10YT=RR rose to 3.4497% compared with its U.S. close of 3.397% on Friday. The two-year yield US2YT=RR, which rises with traders' expectations of higher Fed fund rates, touched 3.9763% compared with Friday's close of 3.846%. USD/
Yields on triple A-rated German Bunds, which fall as bond prices rise, had hit their lowest since mid-December DE10YT=RR at 1.951% in the early panic but had shuffled back above 2% as markets began to relax a little.
Risk aversion had also seen the spread between riskier Italian debt and German debt DE10IT10=RR widen out to over 200 basis points again, but that gap - which reflects how much more Rome has to pay to borrow than Berlin - also improved. GVD/EUR
"There was nothing great that could come out of this, but it is probably the best of a bad list of outcomes," said AXA Chief Economist Gilles Moec, who had been surprised by the initial rout.
"All in all this was pretty swift," he added. "And in terms of reassurances (from authorities) it is pretty decent."
The rudest shock in the rushed deal to save Credit Suisse was reserved for the holders of the bank's riskiest tranche of bonds, known as AT1s, that can be converted into equity when troubles hit.
Not only did they discover they are the only investors not getting any compensation from the rescue, but that the long-established practice of giving bondholders priority over shareholders in debt recovery had been turned on its head.
The result was a selloff in a swathe of Asian AT1s overnight, but European supervisors stepped in there too, reassuring European traders that Swiss authorities' actions weren't likely to be replicated in the European Union.
"This approach (of hitting shareholders before bondholders) has been consistently applied in past cases and will continue to guide the actions of the SRB (Single Resolution Board) and ECB banking supervision in crisis interventions," they said in a statement.
"Additional Tier 1 is and will remain an important component of the capital structure of European banks," they added.
Safe-haven demand eased in the currency markets, with the Japanese yen JPY=EBS flat after gaining as much as 0.75% overnight, while both the Swiss franc CHF= and the euro EUR= started to rise against an unusually subdued U.S. dollar, which is normally a winner in turbulent times. /FRX
Oil prices whipsawed in volatile trade after diving to their lowest levels in 15 months as the market worried that risks in the global banking sector could spark a recession that would sap fuel demand. O/R
West Texas Intermediate crude futures CLc1 fell 0.49% to $66.41 a barrel, and Brent crude LCOc1 fell 0.44% to $72.65.
Gold prices pulled back in choppy trade after hitting a one-year high earlier. Spot gold prices XAU= fell 0.46% to $1,978.83 an ounce, after touching a peak of $2,009.59 an ounce. GOL/
World FX rates YTDhttp://tmsnrt.rs/2egbfVh
Global asset performancehttp://tmsnrt.rs/2yaDPgn
Asian stock marketshttps://tmsnrt.rs/2zpUAr4
Credit Suisse goes off piste Credit Suisse goes off pistehttps://tmsnrt.rs/42gv7M0
Additional reporting by Scott Murdoch in Sydney; Editing by Stephen Coates, Angus MacSwan, Jan Harvey and Christina Fincher
To read Reuters Markets and Finance news, click on https://www.reuters.com/finance/markets For the state of play of Asian stock markets please click on: 0#.INDEXA
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