The European Central Bank lifted its key rate by half a per cent as the crisis of confidence over the future of Swiss bank, Credit Suisse eased but the big deal on Thursday came late in the US session (just before 7am Sydney time) when troubled US regional First Republic got a $US30 billion lifeline from a group of major rivals.
That deal will set up a much better Friday in Asia, Australia and other markets. the ASX 200 is looking at a 27-point rise, according to the overnight futures market but could end higher as the rescue news was only confirmed in the final half hour of the session.
The Dow added 371.98 points, or 1.17%, to close at 32,246.55 points. The S&P 500 surged 1.76% to close at 3,960.28. and Nasdaq jumped 2.48% to 11,717.28, as investors bought technology stocks because they are not financial stocks.
All three indexes traded down earlier in the session, with the Dow down more than 300 points at its lowest. But the market turned positive after reported emerged of the forming rescue for First Republic.
The deal will see First Republic Bank get billions in deposits from 11 major American banks including JPMorgan Chase & Co, Citigroup, Wells Fargo, and Morgan Stanley.
It was an attempt to bolster First Republic’s finances and contain the fallout from the collapse of three lenders in the past week – Silvergate, Silicon Valley (SVB) and Signature.
San Francisco-based First Republic is a bank closely linked to the tech sector and for that reason it was thought to be next on the list after SVB fell over a week ago. Its shares slumped 60% on Monday as hedge funds and others sold the shares short in the hope it would be rescued – which it was eventually.
“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities,” the group of banks said in a statement.
Bank of America, Wells Fargo, City and JPMorgan will put in around $US5 billion each while Goldman Sachs and Morgan Stanley will pony up around $US2.5 billion each. Truist, PNC, US Bancorp, State Street and Bank of New York Mellon are on the hook for around $US1 billion each.
The deposits would be obligated to stay at First Republic for at least 120 days, CNBC reported.
Regional bank stocks initially fell on Thursday but reversed higher after reports about the development of the deposit plan.
First Republic shares ended up 10% at the close after being down sharply at the start of the session. The shares in fact down 36% at the start around $US21 and surged to more than $34 at the close as market reports talked about the looming rescue operation.
The rescue of First Republic came after the ECB’s 0.50% rate rise didn’t hit markets.
While some analysts and economists saw a smaller increase because of the banking turmoil, President Christine Lagarde made it clear the central bank had confidence in the area’s banks.
In a post-decision media conference, she repeatedly called the banking sector in the 20 countries using the euro currency “resilient,” with strong financial reserves and plenty of ready cash.
And if it became necessary, she said, the ECB is “fully equipped” to provide additional support to the banking system.
“We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability,” Lagarde said.
And ECB Vice President Luis de Guindos said the eurozone’s exposure to Credit Suisse, which is outside the European Union’s banking supervision structure, was “quite limited” and “not concentrated” in any one place.
That was a key reason for the rate rise decision going ahead as planned.
As for future rate rises, Ms Lagarde said “inflation is projected to remain too high for too long” and that further increases will be based on what the numbers show.
She did not commit either way, unlike her stance before Thursday’s meeting when she said “a rate rise was very likely.”
The absence of any post meeting statement like that suggests the ECB may have ended its increases for the time being.
