US stocks advanced on Tuesday as investors appeared confident in efforts to reduce contagion risks in the financial system and looked ahead to the Federal Reserve’s next interest rate decision.
The blue-chip S&P 500 index added 1.3 percent and the tech-heavy Nasdaq Composite rose 1.6 percent, rising for a second day.
Index KBW Nasdaq Bank gained 5 percent, while beleaguered California-based lender First Republic climbed 29.6 percent, after falling by almost half there.
Banks have steadied after regulators moved to support lenders caught up in financial sector turmoil following the failure of Silicon Valley Bank and two other US lenders this month. US Treasury Secretary Janet Yellen signaled on Tuesday that the government would return all deposits in smaller US banks if necessary.
Sam Gunter, head of FX trading at Britannia Global Markets, said: “Over the past few days, there has been continued supportive sentiment for the banking sector, including from [European Central Bank president] Christine Lagarde said she would act on inflation and financial stability, and Janet Yellen showed support for regional banks.
“That’s why we’re seeing equity markets rise and safe-haven assets like gold and that disappear.”
Investors are turning their attention to interest rate decisions from the US and UK central banks this week. Turmoil in the global banking sector has dampened expectations of the scale of interest rate hikes to fight inflation.
The Fed’s decision will come after a two-day meeting that began on Tuesday. Futures markets predicted on Wednesday the US central bank would raise rates by 0.25 percent from the current level of between 4.50 percent and 4.75 percent.
Gennadiy Goldberg, US rate strategist at TD Securities, said Yellen’s comments about protecting regional US banks have freed the Fed to focus on cooling inflation by raising interest rates, rather than pausing to calm concerns about banking instability.
“If there are more announcements from the Treasury and the government as a whole, I think that could stabilize the market and actually allow the Fed to continue to tighten policy,” he said.
“If they stop hiking now, it will be very difficult to start raising rates again. . . With hiking 25 [basis points]almost keep it optional to continue hiking in the next meetings.
The Bank of England met on Thursday, but prices from the swap market showed investors divided between a 0.25 percent increase and no change.
“The question now is whether the banking sector’s problems are enough to tip the BoE to a holding rate,” said analysts at Bank of America. “Greater uncertainty about the economic outlook as well as tighter credit conditions could push the BoE to a holding level.”
The yield on the two-year Treasury note, which closely follows interest rate expectations, jumped 0.22 percentage points to 4.17 percent on Tuesday while the yield on the 10-year note rose 0.11 percentage points to 3.59 percent. Yields move inversely to price.
The yield on two-year German Bunds rose 0.31 percentage points to 2.63 percent, while the 10-year note rose 0.2 percent to 2.29 percent.
European stocks also extended gains on Tuesday as investors took heart from regulatory moves to contain the risk of contagion in the financial system from weak banks.
The Stoxx Europe 600 Banks index closed up 3.8 percent, after gaining 1.2 percent in the previous session.
Broader indexes also advanced, with the Stoxx 600 area up 1.3 percent, Germany’s Dax up 1.8 percent, France’s CAC 40 up 1.4 percent and London’s FTSE 100 up 1.8 percent.
Credit Suisse and UBS, which announced plans to merge in a deal brokered by the Swiss government on Sunday, rose 7.3 percent and 12.1 percent respectively.
As part of the merger deal, $17bn worth of Credit Suisse additional tier 1 (AT1) bonds, a type of high-risk bank debt designed to take losses during the crisis, has been wiped out, Swiss financial regulator Finma said at the weekend.
This led to a sell-off in AT1 bonds at other financial institutions on Monday, as investors worried that bondholders would have to suffer bigger losses than Credit Suisse shareholders, who were given UBS shares.
“It’s still very early. Initial response [to the deal] not positive but the statements from the supervisory arm and policymakers look good,” said Jack Allen-Reynolds, deputy chief economist for the euro zone at Capital Economics. “We are still in a weaker position but there are tentative signs that the situation is not getting worse.”
In Asia, Hong Kong’s Hang Seng index closed up 1.4 percent and China’s CSI 300 gained 1.1 percent. South Korea’s Kospi added 0.4 percent. Japanese markets are closed for the spring equinox holiday.
Asian banking stocks also gained, with the Hang Seng Finance index adding 1.4 percent. HSBC and Standard Chartered gained 1.7 percent and 4 percent, respectively.
Spot gold prices fell 2 percent to trade at $1,939.50 a troy ounce after briefly touching the highest level since March 2022 on Friday.
Oil prices continued to rise after rising more than 1 percent on Monday. The international benchmark Brent crude, and the US equivalent WTI, gained 2.1 and 2.5 percent, respectively.