Market sentiment improves as Credit Suisse gets support from Swiss central bank. ECB follows through with 50bp hike. Equity markets rise as financials recovery some lost ground

Market sentiment has improved over the past 24 hours. Equity markets are up, bond yields generally higher and flatter, credit spreads tighter and the fear factor has eased somewhat. Some big moves continue in rates, not so much in currencies. Oil prices have recovered some of yesterday’s losses.

Market nerves were soothed to some extent yesterday with the announcement that Credit Suisse would borrow as much as CHF50b (around US$54b) from the Swiss National Bank and seek to repurchase around US$3b debt. The chairman of Saudi National Bank, Credit Suisse’s biggest shareholder, said he didn’t think the bank would need more capital. The liquidity backstop saw investor sentiment improve immediately. Credit Suisse’s share price surged about 40% on open, before ending up around 18% on the day reclaiming about two thirds of the previous day’s losses. The Euro Stoxx 600 index rose 1.2% with financials and technology being among the better performers.

In the US, the WSJ reported that JP Morgan and Citigroup are discussing a joint rescue of First Republic Bank. This brought a sharp positive reversal in the latter’s share price and aided the positive turn in sentiment.

The ECB hiked 50bps, following through on its prior guidance and despite the recent market turbulence. The takes the key deposit facility rate to 3.00% from 2.50%. The ECB provided no guidance on its next move but forecasts suggest more upside. It said ‘inflation is projected to remain too high for too long’, while ‘uncertainty reinforces need for data-dependent approach’. ECB President Lagarde noted in the press conference that ‘it is not possible to comment at this point on rate path’ going on to say ‘if our baseline (on inflation) continues after the uncertainty fades, then we have a lot more ground to cover.’ The ECB plans to carry on with tis plans to wind down TLTRO, no change to QT plans.

Polled expectations for the ECB may have been for a 50bp hike, but market pricing had been volatile ahead of the meeting at one point getting to firmly favour a 25bp hike before rebounding to go into it roughly evenly split between a 25 and 50 bp hike. Post meeting, the market has near 30bps priced in for the next meeting in May and nearly fully prices a follow up 25bp hike by September. 
European bond yields were volatile before and after the ECB but have trended higher and flatter. German 2-year Bund yields are up about 20bps, with 10-year yields up around 16bps.

US data was second tier and took a back seat to other news. It was mixed relative to expectations, with better housing permits and starts indicators and tighter jobless claims, while the Philadelphia business survey was weaker than expectations.

The S&P500 is current up around 1½%, driven by financials as banking concerns retreated. US bank stocks are up nearly 2.5%, essentially recouping yesterday’s losses. The VIX ‘fear’ index has dropped back to around 24 having punched through 30 earlier in the week. Credit spreads retraced some of yesterday’s widening, with US investment grade in around 5bps and high yield spreads tightening about 35bps.

Reducing fear as Fed pricing rebound from yesterday, with around 20bps priced for next week’s meeting up from 10bps priced this time yesterday. The 100bps of Fed cuts later this year that the market was pricing yesterday has been pared back to around 80bps. Market pricing remains fluid. The 2-year Treasury yield is currently up 25bps, after trading nearly 50bps higher off yesterday’s lows. The curve has flatten, with the 10-year rate up ‘only’ 10bps currently sitting around 3.56%.

Moves in currency markets have been less pronounced. The US dollar is marginally lower on the day. European currencies were volatile around the ECB statement, but have generally gained ground. After testing down toward 1.0550, EUR is currently a touch over 1.060 recouping some of yesterday’s losses. GBP is up around 0.4% sitting just above 1.210.

Reducing fear and stabilising to improving commodity prices has generally helped commodity linked currencies. AUD has maintained its modest advance post yesterday’s better AU employment data sitting around 0.4% higher near 0.6650.

Yesterday’s AU employment data was stronger than expectations and highlights a still-tight labour market. AU rates and AUD rose post release, although the rate moves were relatively small compared to the intra-day gyrations generated by offshore volatility. AU short end swap yields were net down around 10 bps during the NZ session as the market priced out future RBA hikes and yesterday started to entertain the possibility of a rate cut. Overnight, AU 3-year bond futures sold off around 10bps. 

NZD currently sits a touch over 0.6160, close to where we left it yesterday with minimal movement overnight. NZ GDP underwhelmed already soft market expectations yesterday with a 0.6% decline, with downward historical revisions to boot. This sent the NZD and domestic interest rates lower, although, like in Australia, the data driven moves were relatively small compared to those driven by the bigger offshore forces over recent days.

The stronger AU data, weaker NZ data combo saw NZD/AUD retreat from around 0.9350 to under 0.9300 by NZ close yesterday. Overnight the cross has oscillated around 0.9280 where it currently sits.

Domestic rates closed significantly lower and generally steeper across the bond and swap curves yesterday largely reflecting the drama from the previous night’s offshore session with some encouragement from the lower NZ GDP print thrown into the mix. In yet another volatile session, NZ 2-year swap yields closed around 22bps lower, while 10-year swap yields fell about 12bps. NZGB yields were lower across the curve and cheapened relative to NZ swap. Short end NZGBs were around 18-19bps lower in yield, while NZGB33’s closed about 11bps lower in yield.

Two local banks changed NZ OCR calls yesterday post the GDP data with both seeing one final 25bp hike in April to a peak of 5.00%. Market pricing currently favours a 25bp hike in April and a peak of 5.25% by July, but conditions remain fluid.

There is only limited US data on the calendar over the coming 24 hours. In any case, market attention will remain firmly focused on the bigger global issues out there.