SINGAPORE Asian stocks dropped off lows on Tuesday, with the rescue of Credit Suisse stemming selling in bank shares, though the mood was fragile and traders unsure how Federal Reserve policymakers will respond this week.
The Fed starts a two-day meeting later in the day and after a wild few sessions, U.S. interest rate futures pricing implies that a peak in rates is imminent or already reached, with newfound stability concerns to push inflation-fighting aside.
The broadest index of Asia-Pacific shares outside Japan was 0.4 per cent, according to the broadest index of MSCI. Australian shares rose by 0.9 per cent to leave behind a four-month trough, while the Hong Kong HSBC and Standard Chartered stock price went up more than 1.5 per cent to maintain a steady position after a clobbering on Monday.
Japanese markets were closed for a holiday, which left Treasuries untraded in Asia and lightened currency trade. S&P 500 futures were flat and European futures rose 0.5 per cent.
The tense calm follows a Swiss government-backed buyout of Credit Suisse by UBS that seems to have cauterised concerns over European financial stability.
The wipeout of some credit Suisse bondholders has sent a shockwave through bank debt, while the speed with which trouble spreads from regional U.S. banks to humble a big systemic bank in Europe has rattled markets.
The last global financial crisis played out over 18 months, today's crisis is only 10 days old and has already resulted in the collapse of some U.S. regional banks and the arranged marriage of UBS and Credit Suisse at 0.06 x book value, according to bank analyst Jonathan Mott at Barrenjoey in Sydney.
While global regulators are acting with speed, this seems to be a game of 'whack-a mole. San Francisco lender First Republic is emerging as the next pressure point. Its share price was halved on Monday due to worries that $30 billion in deposits placed by bigger banks wouldn't be enough to shore up its stability.
The plan is to expand Federal Deposit Insurance Corp coverage to all deposits, according to Bloomberg News on Monday.
The dust is yet to settle on the write down of Credit Suisse's additional tier 1 debt to zero.
It set off frantic selling of similar debt because holders were surprised that the long-standing practice of paying creditors before shareholders was not fully followed.
After regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent, prices in Asia stabilized on Tuesday.
Thomas Jacquot, head of research at the FIIG in Sydney said that over the last 24 hours as more details have come out, some people are realising that maybe the initial reaction was not the right one. You can't take this as a precedent - it's an exception. It is only a precedent in Switzerland. Later in the week, the Fed and Bank of England set policy levels to be set to be clearer, as well as the broader path for rates.
The Fed funds futures suggest a 1 in 4 chance that the Fed will pause on Wednesday, while markets are divided on the prospect of a hike in Britain, according to CME's FedWatch tool.
The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes, said Steve Englander, head of Standard Chartered's head of G 10 FX research.
The U.S. dollar was steady in foreign exchange after slipping overnight. It last bought 131.30 yen and held at $1.0711 per euro.
Demand jitters have had Brent crude futures pinned below $80 a barrel, they were last at $73.15. On Monday, gold hit a one-year high of $2,009 an ounce, before easing to $1,980 on Tuesday.