European markets to open higher after Credit Suisse drama as investors split on central bank rate hikes
European markets are set to open higher on Tuesday as investors bet that banking turmoil will put a halt to central banks’ battle to contain inflation
The FTSE and Frankfurt’s DAX were called up 0.59 per cent while the CAC in Paris was called up 0.47 per cent.
After the drama of the past few days, markets were likely pausing for breath between the banking crisis and the interest rate decisions from the Fed and the Bank of England over the next few days.
CMC Market’s Michael Hewson said “European open looks set to be a positive one, however, sentiment is likely to remain fragile over the next few days until we see the outcome of tomorrow’s Fed meeting, and their take on recent events”.
“On Thursday we get the latest central bank decisions from the Swiss National Bank and the Bank of England,” Hewson continued.
Investors are split as to whether the Bank will raise rates by 25 basis points or keep them level in the face of banking turmoil.
“Following market turmoil in the wake of the SVB failure and Credit Suisse woes, markets have reined in previous hike expectations and are currently pricing a 44 per cent chance of a 25bp rise in the meeting this week,” Canada Life Asset Management’s Steve Matthews said.
Matthews expects the Bank to raise rates by 25bps but to “signal a pause in its hiking cycle”.
The US Federal Reserve begins its two day policy meeting today in a similar predicament.
While inflation remains above the Fed’s two per cent target, turmoil in the banking market is likely to reduce lending, helping to quash inflation.
There are also concerns that further hikes may put stress on other parts of the financial sector. Markets expect a 25bps hike, but reckon the Fed might pause to assess its options after the decision.
Lower interest rate expectations boosted equity markets. US markets finished the day strongly with the Dow Jones closing 1.20 per cent higher and the S&P ending up 0.89 per cent.
First Republic had another day to forget however, slumping over 47 per cent and prompting Wall Street bank chiefs to consider another emergency intervention to prop up the teetering lender.
But problems at the bank had little effect on the wider market. “The problems being felt in the US banking system were being shrugged off with further weakness in First Republic Bank being treated as a localised difficulty, rather than anything more systemic,” Hewson said.