Marketmind: And breathe – edgy market calm returns

A look at the day ahead in U.S. and global markets from Mike Dolan

No news appears to be good news for now as two weeks of bank failures and stress make way for a nervy examination of portfolios for damage while central banks judge whether the episode should affect their interest rate plans.

A second weekend in a row of emergency bank rescues – this time the orchestrated buyout of Credit Suisse by its larger Swiss rival rival UBS – has left many unanswered questions about the viability of smaller U.S. banks and how systemically-important global banks are wound down.

With lingering doubts about how shareholders, creditors and depositors take the hit when a bank fails, months of court battles and the drafting new regulations lie ahead.

But even as jitters about the state of small and medium-sized U.S. banks persist, amid fears for ongoing deposit flight, global markets appeared to breathe a collective sigh of relief on Tuesday that the larger core banks in the United States and Europe look strong enough to weather the storm.

They were less sure how an inevitable tightening of business and household credit, amid higher bank funding costs related to the fracture, affects the wider economy. And for that they look to this week’s two-day meeting of the Federal Reserve that begins on Tuesday and the Bank of England equivalent on Thursday.

With Wall St stocks pushing higher again on Monday, European bourses followed suit for a second day. Crucially, euro zone bank stocks also rallied for a second day and were up almost 4% early on Tuesday – following losses of up to 20% over the turbulent two weeks.

UBS was also up almost 4% and there were gains in many so-called AT1 bonds – junior bank debt at the eye of the Credit Sussie workout storm as investors in these bonds were wiped out even as shareholders got something from the UBS deal.

As the relative calm across banking stocks and bonds seemed to hold, interest rate markets readjusted and focused squarely on Wednesday’s Fed decision.

Futures markets that had only 24 hours ago doubted the Fed would hike rates again in this cycle, now see an 80% chance of another quarter point rate rise this week. They still price up to half a point of rate cuts from there to year-end, although that’s half of what was priced early on Monday.

There’s a 50% chance of a Bank of England rate rise this week now in money market pricing.

Wildly volatile U.S. Treasury markets also appeared to find a level, with 2-year Treasury yields climbing back above 4% from as low as 3.63% yesterday.

As a measure of the gyrations in bond pricing, a key gauge of Treasury market volatility climbed again on Monday and remains well in excess of the even the worst moments of the pandemic hit three years ago.

The MOVE has recorded its biggest monthly rise since the banking crash of 2008 and is more than twice the average level of the last 20 years.

Elsewhere, a refocus on the underlying economy will see a fresh look at the U.S. housing sector, while another round of job cuts among Big Tech companies emerged with thousands of layoffs at Amazon.

In politics, New York City braced for a possible indictment of Donald Trump over an alleged hush-money payment to porn star Stormy Daniels during the former President’s 2016 election campaign.

Russian President Vladimir Putin and Chinese leader Xi Jinping were to hold further talks on Tuesday amid Western criticism that Xi’s visit was giving a boost to Moscow as it struggles to make ground in its year-long war on Ukraine.

Key developments that may provide direction to U.S. markets later on Tuesday:

* U.S. Feb existing home sales, Philadelphia Federal Reserve’s March services survey; Germany’s March ZEW investor sentiment; Canada Feb consumer price inflation

* Fed’s Federal Open Market Committee starts two-day meeting on interest rates (to Mar. 22)

* U.S. Treasury auctions 20-year bond

* US corporate earnings: Nike

* Britain’s finance minister Jeremy Hunt testifies to parliament

* European Central Bank President Christine Lagarde speaks in Basel, ECB Chair of Supervisory Board Andrea Enria in Brussels

(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)