LDN - Business

Europe battles to shake off nagging banking concerns

[April 27, 2023] By Marc Jones

LONDON (Reuters) - The dollar remained under pressure and world share markets were trying to stay positive on Thursday, as ongoing rumbles in the U.S. banking system kept investors cautious ahead of a barrage of top-tier European and U.S. data.

London, Paris and Frankfurt stocks nudged into positive territory as reassuring earnings from UK bank Barclays, Germany's Deutsche Bank and consumer goods giant Unilever added to Facebook owner Meta's upbeat overnight results. [.EU]

UniCredit also brought a sigh of relief as it redeemed an 'AT1' bond in the market's first test since Credit Suisse's collapse wiped out its AT1s, raising questions about their worth as a capital tool more broadly.

Elsewhere, the mood was still nervy.

The latest U.S. bank in the crosshairs, First Republic Bank, looked set for a 5% gain in its shares following a brutal sell-off this week that has wiped out 60% of its value.

The yield, or cost of borrowing, on the 1-month Treasury bill headed higher again on concerns the U.S. could hit its self-imposed debt limit in the coming months, while oil traders licked their wounds after some heavy falls on Wednesday. [O/R]

In the currency market, the dollar was down for the sixth session in the last seven, although the euro was showing its standalone strength as it approached a record high on a trade-weighted basis.

"European markets are lacklustre if anything," said CMC Markets senior analyst Michael Hewson.

"We are looking at the earnings numbers and they are not bad really," he said, referring to the Unilever, Barclays and U.S. tech giants like Meta.

"But markets are just fixated on the banking sector troubles and how many more rate rises we are likely to get from the Federal Reserve and the European Central Bank."

IN YOUR FACE(BOOK) BEARS

Nasdaq futures gained 0.8% as Meta's shares soared 10% in premarket pricing following its earnings beat. Intel and Amazon will both report results later on Thursday.

In Asia, MSCI's broadest index of Asia-Pacific shares turned around early falls to close 0.2% higher.

Japan's Nikkei broadly matched the gains, although Singapore's Straits Times Index was dragged lower by a tax increase for real estate companies, and Chinese tech stocks dipped after Washington warned Chinese cloud computing firms posed a threat to U.S. security. [.SS]

Wednesday's Wall Street session had seen First Republic Bank's shares sinking as much as 41% at one point to leave it valued at about $888 million, a far cry from its peak of more than $40 billion in November 2021.

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A stock broker sits in front of the share price index DAX graph following the shares of Credit Suisse hit a record low in a rout of European bank stocks, as investor concerns about sector stresses triggered by Silicon Valley Bank's implosion deepened, at the stock exchange in Frankfurt, Germany, March 16, 2023. REUTERS/Kai Pfaffenbach

Investors are waiting to see whether it can find buyers for assets and engineer a rescue. CNBC had reported that U.S. government officials were currently unwilling to intervene.

First Republic declined to comment on Wednesday's share price falls.

TUG-OF-WAR

The Atlanta Federal Reserve's GDPNow, which tracks how incoming data influences estimated gross domestic product (GDP), showed the estimate for first-quarter growth was now at an annualised 1.1%, sharply down from 2.5% just a week ago.

That suggests there may be a downside risk to U.S. first-quarter GDP data, due later on Thursday. Analysts polled by Reuters tip an expansion rate of 2% although a number of major investment banks remain of the view a recession looms this year.

Fed funds futures are pricing in a chance of about 75% that the Federal Reserve will hike interest rates by 25 basis points (bps) at its May meeting next week.

The euro zone will also publish its first quarterly GDP print on Friday. That will inevitably feed the debate on how much higher the ECB is likely to raise its rates when it meets a day after the Fed in a week's time.

Germany's 10-year government bond yield, the euro area's benchmark, rose 4 bps to 2.42% after dropping by around 10 bps in the last two sessions.

It was still 35 bps below its highest since July 2011 at 2.77%, hit in early March, and more than 40 bps above its lowest reached in mid-March, when fears that a full-blown banking crisis might be brewing were at their height.

U.S. Treasuries yields moved slightly higher too, with the 2-year up to 3.96%, and the 10-year up 3 bps to 3.46%, albeit well below recent peaks.

"There’s been a bit of a tug-of-war in markets over the last 36 hours," Deutsche Bank analyst Jim Reid said, "between the dominance of U.S. tech pulling aggressively on one side against the still shaky foundations of U.S. regional banks on the other".

(Additional reporting by Stella Qiu in Sydney; Editing by Toby Chopra and Mark Potter)

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