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AFP

Business

Stocks rally as panic eases over banks

Credit Suisse US Federal Reserve United States London

Speculation is mounting that the Federal Reserve will cut interest rates by the end of the year, despite still-high inflation . ©AFP

London (AFP) - Stock markets jumped Tuesday, gradually recovering from last week's plunge, as shares in banks rallied on easing fears of a fresh financial crisis.

Panic across markets eased after authorities in leading economies pledged support for depositors and troubled lenders following the recent collapse of Silicon Valley Bank and Signature Bank in the United States.

Still, the takeover of troubled Credit Suisse by Swiss rival bank UBS for $3.25 billion fanned concerns about what could be next on the chopping block, and analysts warned it was too early to say that the crisis was over.

Fed uncertainty

"Despite the apparent relief, uncertainty is still in charge," noted Neil Wilson, chief market analyst at Finalto.

The upheaval in the banking sector has led traders to re-evaluate their bets on the Federal Reserve's plans on interest rates, with speculation swirling that it could cut borrowing costs by the end of the year to provide further stability.

This would follow a series of aggressive rate hikes carried out by the Fed and other central banks since late 2021 aimed at cooling soaring inflation.

Before the banking crisis kicked off, expectations were for US borrowing costs to go as high as six percent, but now forecasts are for them to end at around four percent.

They are currently at 4.5-4.75 percent, and there is much talk about whether the US central bank holds fire at its Wednesday decision or lifts rates by 25 basis points.

Lower expectations for US rates rises weighed on the dollar, while oil prices firmed after heavy losses in recent sessions as investors fretted that contagion from the banking woes could hurt economic growth.

All three main indices on Wall Street ended higher Monday -- with the Dow up more than one percent -- while European markets also ended with gains.

Asia caught up Tuesday, closing with solid gains.

Europe's main stock markets were up around 1.5 percent approaching the half-way stage and ahead of US markets reopening.

Promises of support from the Fed and other central banks, as well as the buyout of Credit Suisse, have sent equities higher.

European bank shares surged Tuesday, with Commerzbank up seven percent, Barclays winning 4.8 percent and BNP Paribas up 4.6 percent.

However, embattled First Republic Bank collapsed almost 50 percent Monday, despite a coalition of US lenders agreeing to inject it with $30 billion.

There was less concern over high-risk debt markets with holders of AT1 bonds at Credit Suisse losing $17.3 billion after authorities required them to be written off.

The assets, also known as "CoCo" bonds, tumbled Monday as they were wiped out in the deal despite equity investors getting some of their cash back.

That led traders to question the usual hierarchy of bonds over stocks.European officials on Monday reiterated that the usual structure remained the same for claims.