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By Stephen Culp, New York stock market reporter

Tuesday, March 21, 2023

Global market skittishness over whether contagion is afoot within the banking sector appears to be waning.

In fact, if European and U.S. markets on Monday are a prologue to Asian markets on Tuesday, investors can look forward to a rebound.

On Monday, the Hang Seng tumbled 2.7% to a three-month low and the Nikkei 225 dropped 1.4%, but the risk-off fog began to lift as the earth rotated around to Europe.

The logo of UBS Group is seen at an office building in Hong Kong, China March 20, 2023. REUTERS/Tyrone Siu

European shares reversed an early sell-off to close up 1% as bank shares rallied, and all three U.S. stock indexes ended higher, led by a 1.2% jump in the blue-chip Dow.

Safe-haven assets – gold and the greenback – were both down about 0.5% at the closing bell.

The S&P Banking index ended the session up 0.6%, but even with Monday’s advance, the index has plunged 21.3% this month.

Last week’s banking bloodbath culminated with the UBS buyout of Credit Suisse after financial heavy hitters in the U.S. threw a $30 billion lifeline to First Republic Bank.

And on Monday, the Federal Deposit Insurance Corporation orchestrated an agreement for a subsidiary of New York Community Bancorp to buy deposits and loans from the freshly shuttered Signature Bank.

All of which appears to have calmed fears and brought stability to the market, for now.

As central banks around the world juggle financial sector liquidity needs with their ongoing effort to curb inflation while avoiding recession, with the Federal Reserve due to convene for its two-day monetary policy meeting on Tuesday.

Market expectations regarding the size of the Fed’s next rate hike to be announced on Wednesday – and indeed whether it will raise interest rates at all – are in constant flux.

At last glance, financial markets have priced in a 73.1% likelihood of a 25 basis point increase to the Fed funds target rate and a 26.9% probability of no hike at all, according to CME’s FedWatch tool.

European Central Bank president Christine Lagarde insisted on Monday that the ECB has the tools to contend with financial market turbulence while fighting inflation, just days after announcing a hawkish a 50 basis point policy rate hike.

Graphics are produced by Reuters.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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