By Koh Gui Qing and Marc Jones
NEW YORK/LONDON (Reuters) - Bank stocks rallied on Monday and a cross-asset scramble for safety abated, as investors heaved a tentative sigh of relief that a historic weekend rescue of financial heavyweight Credit Suisse is containing the banking crisis for now.
Sunday saw the most dramatic state intervention since the 2008 global financial crisis, with UBS buying Credit Suisse for 3 billion francs ($3.2 billion) in a takeover backstopped by unlimited funding pledges from the world's top central banks.
The speedy orchestration of Credit Suisse's takeover was received by investors as an acceptable measure to stem contagion, but fears that other struggling banks might teeter next kept markets on edge.
"While the Credit Suisse rescue might draw a line under that particular institution’s problems, it is clear that confidence in the financial sector overall is still extremely fragile," said Vicky Redwood, a senior economic adviser at Capital Economics.
Indeed, shares of First Republic Bank, the lender drawing the most concern from U.S. investors right now, bucked gains on Wall Street and cratered 47.1%, after S&P Global downgraded its credit ratings deeper into junk on Sunday.
The Dow Jones Industrial Average jumped 1.2%, the rose 0.9%, and the Nasdaq Composite Index gained 0.4%.
The KBW Bank Index, a proxy for banks, jumped 0.8%.
The latest banking crisis started after two U.S. lenders, Silicon Valley Bank and Signature Bank, collapsed this month, while First Republic Bank has so far failed to shore up investor confidence despite having received emergency support.
Losses in European bank shares also recovered, climbing 1.3% after initially dropping 6%, as investors digested the support efforts and the pace at which they had come. Credit Suisse's own shares slumped 55.7% and those of its acquirer UBS jumped 1.3% after tumbling nearly 13% earlier in the session. [.EU]
The broader European STOXX 600 index also managed to make it into positive territory to be up 0.98%.
"Credit Suisse is our Lehman moment in Europe, but we recognise that and we are not going to make the same mistake," Close Brothers Asset Management Chief Investment Officer Robert Alster said of the speedy action by authorities over the weekend.
He said the European Central Bank, Bank of England and others would be well aware "of the next gazelles in the chain that the lions will be hunting" - meaning other large banks with investment banking arms such as Deutsche Bank, BNP in France or Barclays in the UK - and will step in with support if needed.
"There is a lot of firepower from the authorities to counter what is the steadily eroding loss of confidence," Alster said.
Gains in stocks were accompanied by higher Treasury yields, as bond investors weighed the chances of whether the Federal Reserve will skip raising interest rates when it meets this week given the upheaval among banks.
Fed funds futures show a 26.9% probability of the Fed holding its overnight rate at a current 4.5%-4.75% when policymakers conclude a two-day meeting on Wednesday, CME's FedWatch Tool shows.
The yield on benchmark 10-year Treasury notes rose to 3.4866% compared with its U.S. close of 3.397% on Friday. The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 3.9700% compared with Friday's close of 3.846%. [USD/]
Yields on triple A-rated German Bunds, which fall as bond prices rise, had hit their lowest since mid-December at 1.951% in the early panic but had shuffled back above 2% as markets began to relax a little.
Risk aversion had also seen the spread between riskier Italian debt and German debt widen out to over 200 basis points again, but that gap - which reflects how much more Rome has to pay to borrow than Berlin - also improved. [GVD/EUR]
"There was nothing great that could come out of this, but it is probably the best of a bad list of outcomes," said AXA Chief Economist Gilles Moec, who had been surprised by the initial rout.
"All in all this was pretty swift," he added. "And in terms of reassurances (from authorities) it is pretty decent."
GRAPHIC: Credit Suisse goes off piste Credit Suisse goes off piste (https://www.reuters.com/graphics/CREDITSUISSEGP-STOCKS/akveqegdgvr/chart.png)
The rudest shock in the rushed deal to save Credit Suisse was reserved for the holders of the bank's riskiest tranche of bonds, known as AT1s, which can be converted into equity when troubles hit.
Not only did they discover they are the only investors not getting any compensation from the rescue, but they also found that the long-established practice of giving bondholders priority over shareholders in debt recovery had been turned on its head.
The result was a sell-off in a swath of Asian AT1s overnight, but European supervisors stepped in there too, reassuring European traders that Swiss authorities' actions were not likely to be replicated in the European Union.
"This approach (of hitting shareholders before bondholders) has been consistently applied in past cases and will continue to guide the actions of the SRB (Single Resolution Board) and ECB banking supervision in crisis interventions," they said in a statement.
"Additional Tier 1 is and will remain an important component of the capital structure of European banks," they added.
Safe-haven demand eased in the currency markets, with the Japanese yen flat after gaining as much as 0.75% overnight, while both the Swiss franc and the euro started to rise against an unusually subdued U.S. dollar, which is normally a winner in turbulent times. [/FRX]
Oil prices recovered some ground in volatile trade after diving to their lowest levels in 15 months as the market worried that risks in the global banking sector could spark a recession that would sap fuel demand. [O/R]
West Texas Intermediate crude futures rose 1.09% to $67.47 a barrel, and Brent crude rose 1% to $73.7.
Gold prices pulled back in choppy trade after hitting a one-year high earlier. Spot gold prices fell 0.45% to $1,978.57 an ounce, after touching a peak of $2,009.59 an ounce. [GOL/]
(Reporting by Koh Gui Qing in New York and Marc Jones in London; Additional reporting by Scott Murdoch in Sydney; Editing by Christina Fincher and Matthew Lewis)