Marketmind: Shock and awe – or mayday?

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

Markets are struggling with whether to be relieved by the sheer scale of Thursday’s U.S. bank rescue or be terrified by it.

Slightly punch drunk from a week of withering bank runs, stock price plunges, emergency bank bailouts and then a hefty European Central Bank interest rate rise into the mix, an eerie calm descended over world markets first thing Friday.

But there was little confidence the rising financial stress would dissipate quickly from here.

Large U.S. banks injected $30 billion in deposits into failing First Republic Bank on Thursday, swooping in to rescue the lender caught up in a widening crisis triggered by the collapse of two other mid-size U.S. lenders this week.

Marshalled by U.S. Treasury Secretary Janet Yellen, Federal Reserve chief Jerome Powell and JPMorgan boss Jamie Dimon, the rescue involved the largest U.S. banks – JPMorgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley.

But worryingly, First Republic’s shares – which have lost more than 70% in 10 days – continue to fall and were down another 15% again in pre-market trading.

The move came the same day as Switzerland’s central bank was forced to shore up the country’s second biggest lender Credit Suisse by offering it $54 billion of emergency liquidity as the battered bank has been ensnared by the anxiety surrounding the U.S. bank shock.

But Credit Suisse shares resumed their decline again on Friday too, dropping over 3% first thing even as European bank stocks clawed back about 1% as Wall St futures hovered little changed following Thursday’s relief rally. The VIX volatility index remained off the week’s highs but stuck at 23.

Fed data showed the extent of the panic over the past week and how it potentially compromises its monetary policy tightening and balance sheet reduction as it prepares to deliver what futures markets now assume will be another quarter-point rate hike next week – even if the last of the cycle.

Banks took an all-time high $152.9 billion from the Fed’s traditional lender-of-last resort facility known as the discount window as of Wednesday, while also taking $11.9 billion in loans from the Fed’s newly created Bank Term Lending Program. The discount window jump crashed through a prior record of $112 billion during the banking collapse of 2008.

Not unlike the Bank of England’s government bond market intervention last Autumn, the move bamboozles the Fed’s quantitative tightening program of balance sheet reduction.

After peaking at just shy of $9 trillion last summer, overall bond holdings had fallen to $8.39 trillion on March 8, before moving up to nearly $8.7 trillion on Wednesday – the highest since November.

Markets are caught in the uncertainty of what happens next.

Having pushed higher amid all the rescue attempts on Thursday, 2-year U.S. Treasury yields clung to 4% on Friday — still down almost a percentage point from where they were little over a week ago. What’s more, 75 basis points of Fed rate cuts are still priced between a peak of 5% in May to yearend.

The dollar was slightly lower.

On top of all the policy head fakes and emergency moves, China’s central bank said on Friday it would cut the amount of cash that banks must hold as reserves for the first time this year to release liquidity and support the economy.

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

* US Feb industrial and manufacturing production, capacity utilization and leading economic index; March University of Michigan sentiment;

* Canada Feb producer prices

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