Asian shares surge, dollar slips after Fed hints at rate pause

A man watches stock quotations on an electronic board outside a brokerage, in Tokyo, Japan, March 20, 2023. REUTERS/Androniki Christodoulou

SINGAPORE   – Asian shares spiked on Thursday and the dollar slid after the U.S. Federal Reserve hinted it could pause interest rate rises following turmoil in the banking sector, though it also reiterated its commitment to fighting sticky inflation.

In a widely expected move, the Fed raised interest rates by 25 basis points, but it recast its outlook to a more cautious stance as a result of the banking stress.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1 percent to touch a two-week high of 515.62. The index was on track for its best week in more than two months.

Focus now shifts to the Bank of England, with investors expecting a quarter-percentage-point increase in its policy rate after a surprise jump in inflation squashed hopes of the central bank pausing its tightening campaign.

Asia’s rally looked unlikely to spread to Europe, where futures were pointing to a lower open. Eurostoxx 50 futures were down 0.53 percent, German DAX futures 0.32 percent and FTSE futures 0.29 percent .

Wall Street ended sharply lower overnight as investors digested the Fed’s policy statement and comments from Fed Chair Jerome Powell’s press conference. E-mini futures for the S&P 500 rose 0.54 percent .

Wall St ends sharply lower as Powell warns inflation fight continues

The Fed’s statement suggested it was on the verge of pausing interest rate rises, but Powell in his press conference said the central bank would do “enough” to tame inflation, and he raised the possibility of further increasing rates if necessary.

Management of Silicon Valley Bank had “failed badly”, but the bank’s collapse this month did not indicate wider weaknesses in the banking system, Powell said.

But sentiment was damaged by a comment from U.S. Treasury Secretary Janet Yellen, who told lawmakers that she had not considered or discussed creating “blanket insurance” for U.S. banking deposits without approval by Congress.

Yellen says not considering ‘blanket insurance’ for all U.S. bank deposits

“Despite seeming to rule out rate cuts this year … much of the damage seems to have come from Yellen’s parallel remarks to Congress right when Jerome Powell was insisting that the banking sector was sound,” ING economist Rob Carnell wrote in a note to clients.

“This won’t be the final word on either rates or deposit insurance in all likelihood, and a little further homework and collaboration between Fed and Treasury department seems probable.”

Markets are now pricing in an approximately 65 percent chance of the Fed pausing in its next meeting, in May, and a 35-percent chance of a 25 bps rise then, the CME FedWatch tool showed.

In Asia, Japan’s Nikkei fell 0.22 percent , while Australia’s S&P/ASX 200 index lost 0.61 percent .

China’s blue-chip CSI 300 Index rose 0.6 percent , and the Shanghai Composite Index gained 0.8 percent . Hong Kong’s Hang Seng Index jumped 1.5 percent .

Global markets have been volatile, with bank shares battered in the past two weeks following the sudden failures of two U.S. lenders an emergency sale of embattled Swiss banking behemoth Credit Suisse.

Global bank stock rout deepens as SVB collapse fans crisis fears

Regulators and policymakers have scrambled globally to quell contagion risks and ease worries of a banking crisis, but investors remain wary that other small lenders may be vulnerable as credit markets tighten.

In the currency market, the dollar index, which measures the dollar against other major currencies, fell nearly 0.5 percent to fresh seven week low of 101.92. The euro was up 0.45 percent at $1.0904.

The yen strengthened 0.6 percent to 130.64 per dollar, while sterling was last trading at $1.2325, up 0.5 percent .

The yield on 10-year Treasury notes was down 6 basis points at 3.440 percent , while the 30-year Treasury bond was down 3 basis points at 3.667 percent .

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 10 basis points at 3.881 percent .

U.S. crude fell 1 percent to $70.19 per barrel and Brent was at $76.04, down 0.85 percent .