Asia hopes for best on banks, much rests with Fed

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By Wayne Cole

SYDNEY (Reuters) – Asian stocks rallied cautiously on Wednesday on hopes a global banking crisis would be averted, vying with uncertainty over the outlook for US interest rates as the Federal Reserve held a high-stakes meeting on policy keeps

US Treasury Secretary Janet Yellen’s efforts to calm nerves appeared to be working as bank stocks surged overnight. Government officials also considered raising the limit for deposit insurance, although there has been no agreement on this yet.

Tensions continued among US regional banks, with shares in First Republic Bank slipping on suggestions the government could be involved in a bailout deal and potentially disadvantage shareholders.

The uneasiness left both S&P 500 futures and Nasdaq futures little changed. EUROSTOXX 50 futures edged up 0.2%, while FTSE futures rose 0.1%.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan gained 1.3%, while Chinese blue chips rose 0.3%. Japan’s Nikkei rose 2.0%, led by a rebound in battered bank stocks. [.T]

Still fragile sentiment was evident in the latest BofA survey of global fund managers, which found pessimism amid fears of financial risk and a flight from bank stocks was near its worst in 20 years.

All of this puts the Fed in a difficult position as it decides today whether to hike rates.

Goldman Sachs, for example, argues that bank stress will lead to tightening of credit, which is essentially a rate hike, so a pause would be warranted.

“The historical record suggests that the FOMC tends to avoid tightening monetary policy in times of financial stress, preferring to wait until the extent of the problem becomes clear unless confident that other policy tools can mitigate the risks to financial stability be successfully contained,” notes Goldman.

Meanwhile, analysts at JPMorgan are on the side of the majority, announcing a 25 basis point hike, partly because delaying until May would threaten the Fed’s credibility in fighting inflation.

They note that the Fed could still soften its forward guidance by dropping its reference to “ongoing hikes,” much like the European Central Bank did last week.

QT AND POINT PLOTS

An additional complication is whether the Fed will temporarily halt selling its Treasury holdings, known as quantitative tightening, and what Fed members are doing with their dot-plot forecasts of future rate hikes.

The latter will be a key focus as the market is all over the place regarding the political outlook.

After even pricing in the risk of a rate cut last week, futures now imply an 86% chance of a quarter-point rise to 4.75-5.0%. On the other hand, the market was betting on a half-point hike a few weeks ago.

Investors have also returned to expecting another rise in May, but also implying some chance of a cut already in July and rates of 4.25-4.50% by year-end.

How Fed Chair Jerome Powell handles all of this in his 1830 GMT press conference could well dictate the course of markets for the rest of the week.

Bond investors will be hoping he can bring some calm given the wild volatility of the past few days. Two-year Treasury yields hesitated at 4.13% after completing a remarkable round trip from 5.085% to 3.635% in just nine sessions.

European bonds joined the ride. Overnight, German two-year yields posted their largest daily jump since 2008 as markets resumed pricing in further ECB hikes.

That jump helped push the euro to a five-week high of $1.0789 overnight and last held at $1.0770.

The dollar reversed against the yen, whose yields are still tightly controlled by the Bank of Japan, rising to 132.40. Safe haven demand for the yen had pushed the dollar as low as 130.55 earlier in the week.

In commodities, a slight improvement in risk sentiment saw gold fall to $1,939 an ounce, off Monday’s high of $2,009. [GOL/]

Oil prices eased after an industry report showed US crude inventories rose unexpectedly last week, in a sign that fuel demand could slow. [O/R]

Brent fell 41 cents to $74.91 a barrel, while US crude fell 40 cents to $69.27.

(Reporting by Wayne Cole; Editing by Stephen Coates and Lincoln Feast.)