Stocks cling to 2-week high in cautious trade ahead of Fed

(C) Reuters. A woman walks past a screen displaying the Hang Seng Index at Central district, in Hong Kong, China March 21, 2023. REUTERS/Tyrone Siu

By Koh Gui Qing and Dhara Ranasinghe

NEW YORK/LONDON (Reuters) – World stocks steadied near two-week highs on Wednesday as investors held out hope that the banking crisis is receding for now, as they awaited the outcome of a Federal Reserve policy meeting.

The U.S. central bank is expected to raise rates by 25 basis points (bps) in a decision that will land amid a brewing political storm over Fed oversight of collapsed Silicon Valley Bank, and with the financial world hanging on the words of Fed chief Jerome Powell about how he navigates market turmoil.

Data showing British inflation unexpectedly rose to 10.4% in February meanwhile lifted expectations for a quarter point rate hike at Thursday’s Bank of England meeting, boosting sterling.

By late morning in New York, the Dow Jones Industrial Average was flat, the gained 0.19%, and the Nasdaq Composite Index rose 0.22%. [.N]

This all lifted global equities, as tracked by MSCI’s World Stock Index, to a near two-week-high, as the index rose 0.46%.

“The coordinated actions to resolve the banking turmoil have restored a semblance of order for now,” said Art Hogan, chief market strategist at Riley Wealth.

Efforts by regulators and policymakers globally to counter banking sector turmoil have helped stem a rout in equity markets and now focus on was the Fed to give markets further reason for a recovery.

“It is very tricky for them,” said Francois Savary, chief investment officer at Prime Partners, referring to Fed policymakers.

“Either they do nothing and say they are still in the process of hiking rates because of inflation or they do 25 bps and say they don’t see the financial situation as putting the economy at risk but we will assess the impact.”

QT AND DOT PLOTS

An added complication is whether the Fed temporarily stops selling its holdings of Treasury debt, known as quantitative tightening, and what Fed members do with their dot plot forecasts for future rate hikes.

(Graphic: Fed QT in question? – https://fingfx.thomsonreuters.com/gfx/mkt/znpnblxwdpl/One.PNG

Having even priced 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%. A couple of weeks ago the market had been wagering on a half-point hike.

Bond investors will be hoping Powell can instil some calm given the wild volatility of recent days. Two-year Treasury yields, which rises with traders’ expectations of higher Fed fund rates, climbed to 4.2143% compared with a close of 4.177%. [US/]

European bonds have gone along for the ride. German two-year yields overnight recorded the biggest daily jump since 2008 as markets went back to pricing in more ECB hikes.

The euro meanwhile touched a fresh five-week high at $1.0800, benefiting from renewed rate-hike bets, while sterling rose as much as 0.5% to $1.2274 after the British inflation data.

The dollar index was a touch softer, and the yen was steady at 132.53. [USD/]

HOT SPOTS

Markets, unnerved by the banking sector turmoil, remained alert to signs of stress elsewhere.

The upheaval sparked by the collapse of Silicon Valley Bank is not yet over, and a significant number of banks will fail within two years, hedge fund Man Group CEO Luke Ellis said at a conference in London on Wednesday.

“I think we will have significantly more banks that don’t exist in 12-24 months,” Ellis said, adding that he thought smaller and regional banks in the United States and challenger banks in Britain could be at risk.

First Republic Bank (NYSE:FRC) was also in focus after efforts to secure a capital infusion continued without success on Tuesday.

“The banking crisis is creating tighter credit conditions, and if you tighten conditions you weaken economic activity which puts more pressure on the banking sector,” said Savary at Prime Partners. “I don’t consider the banking crisis is over.”

West Texas Intermediate crude futures rose 0.82% to $70.24 a barrel, and Brent crude rose 0.84% to $75.95. [O/R]