Global markets pulled in opposite directions

Global stock markets moved in opposite directions on Wednesday, as European investors responded to strain in the US banking sector, though Wall Street futures rose on bullish updates from Microsoft and Google parent Alphabet.

Europe’s Stoxx 600 share index fell 0.7%, as regional banking stocks dropped 1.3%, while MSCI’s broad index of global stocks was steady after Asian markets outside Japan closed higher in line with rising Wall Street futures.

Shares in troubled San Francisco-based lender First Republic Bank hit a record low on Tuesday as it disclosed a $100bn plunge in deposits, reviving fears about smaller US banks that began with Silicon Valley Bank’s collapse in March.

Nasdaq futures were up 1.2% on Wednesday morning in Europe and S&P 500 futures gained 0.4% ahead of quarterly results from Facebook parent Meta Platforms later in the day, 

Microsoft’s Frankfurt-listed shares rose 6.6% after its quarterly results, that were issued after the US stock market closed on Tuesday, beat analysts’ forecasts. A $70bn share buyback announced by Alphabet also looked set to insulate the mood on Wall Street from banking sector troubles.

US and European financial conditions have tightened significantly since the Federal Reserve and European Central Bank embarked on their most aggressive interest rate-hiking cycles for decades in 2022 to battle inflation.

That has dented confidence about loan-dependent sectors such as real estate, and raised questions about how global banks will deal with defaults.

Huge withdrawals from US banks has prompted investors to dial down profit expectations for the global banking sector, with lenders under pressure to raise interest rates on savings accounts to keep hold of customers’ money.

“Banks around the world want to make sure their deposits will stay,” said Jason Da Silva, director of global investment strategy at Arbuthnot Latham in London. “So there’s an expectation in the market that banks’ earnings and net interest margins have probably peaked.”

The benchmark S&P 500 and Nasdaq indices both fell heavily on Tuesday after the publication of weak consumer confidence data, while bonds rallied sharply and interest rate futures markets priced in a higher chance of Fed cuts later in the year.

US 10-year yields fell nearly 12 basis points (bps) on Tuesday, their sharpest drop in more than a month, while steadying about two basis points higher at 3.398% on Wednesday morning in Europe. Germany’s 10-year yield slipped 2 bps to 2.375% after dropping 11 bps in the previous session.

Complicating the outlook for bond markets, the cost of insuring against the US government defaulting on its debt rose further on Wednesday after treasury secretary Janet Yellen warned that Congress’s failure to lift the debt ceiling would trigger economic catastrophe.

Spreads on five-year US credit default swaps widened to 62 bps, the highest since 2011.

“The chances of US default remain very, very slim,” said Guy Miller, chief market strategist at Zurich Insurance Group. “However, it just takes the probabilities to rise above zero and it becomes a real issue from an investor perspective.”

The dollar index slipped 0.3% on Wednesday, while the euro gained 0.5% to $1.103. Gold was pinned just below $2,000/oz.

The yen was steady at ¥133.6/$ ahead of the Bank of Japan’s meeting this week, as markets await clues from new governor Kazuo Ueda on whether he might ditch policies that have suppressed domestic bond yields and the yen.

Reuters