ECB rate hike expected after Swiss support for Credit Suisse

LONDON, March 16 (Reuters) – European markets rebounded on Thursday as a 50 billion Swiss franc ($53.94 billion) lifeline for embattled lender Credit Suisse prepared traders for a later move of the European Central Bank on interest rates.

Credit Suisse shares jumped more than 20% and major European indices and the Swiss franc all rose around 1% in early trading after the Swiss National Bank and financial regulator FINMA took measurements on Wednesday evening.

The SNB confirmed on Thursday that it would provide “liquidity” to the lender. Credit Suisse, which said it is taking “decisive action”, will borrow up to 50 billion Swiss francs from one of the world’s major central banks.

Shares of European banks (.SX7P) rebounded 2.3% after suffering their biggest one-day decline in more than a year in the previous session, as bond traders again sold European bonds. safe haven ahead of ECB rate decision later.

ECB President Christine Lagarde has widely heralded a 50 basis point hike, but the last week of turmoil, which also saw two US banks collapse, means markets now see it as a call for little nearly 50/50 between 50 and 25 basis points.

“I fear that the ECB is not paying enough attention to this risk (banking sector problems) and that could be a mistake,” said Stefan Gerlach, chief economist at EFG Bank in Zurich and former deputy governor of the Central Bank of Ireland.

The past week shows what happens when major central banks like the US Federal Reserve and the ECB raise interest rates by hundreds of basis points in a short period of time, he added.

“Every time you do something this big, you know there’s a risk somewhere in the financial system,” Gerlach said. “It’s like stretching a rubber band, if you keep stretching it, will it break?”

The yield on two-year German bonds, which is very sensitive to rate expectations, last rose 16 basis points (bps) to 2.55% after plunging 54 bps on Wednesday in what had been a market-wide security rush.

Overnight, Asian stocks had fallen about 1%, but that was largely a catch-up move and none of the frenzy seen in Europe the day before.

Wall Street futures also pointed to a steady start later as demand fell for both the dollar and gold, investors’ traditional games of choice during the market turmoil.

CONTAGION

Many investors, however, said it was far too early to give the green light.

JPMorgan analysts said the SNB loan would not be enough to allay investor concerns and that the “status quo was no longer an option”, leaving a takeover for Credit Suisse as the most likely outcome.

“I think we’re entering hard hat territory again,” said Damian Rooney, dealer at Perth stockbroker Argonaut.

“The word contagion is hitting…we’re scared across the board here,” he said. “The problem is with the flow – you don’t know what you don’t know.”

The MSCI Asia-Pacific ex-Japan equity index (.MIAPJ0000PUS) fell 1% to its lowest level this year. Shares of Japanese banks, which are also considered vulnerable to interest rate hikes, (.IBNKS.T) recouped even deeper early losses but still ended down 3.25%.

Two-year U.S. Treasuries are eyeing their best week since 1987 and yields, which fall when prices rise, are down more than 66 basis points since Friday.

The euro was last up 0.3% at $1.0612 and the Swiss franc was up 0.9% at 0.9267 to the dollar. The preference for safety still supported the yen which was up 0.4% at 132.89 to the dollar in London trading.

Oil prices also recovered some ground after hitting 15-month lows in the previous session. Brent crude futures rose 60 cents or 0.8% to $74.29 a barrel while West Texas Intermediate (WTI) crude futures rose to $68.08 a barrel.

($1 = 0.9270 Swiss francs)

Written by Marc Jones; Editing by Sharon Singleton

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