SYDNEY Reuters- Asian shares bounced a cautious bounce on Wednesday with hopes that a global banking crisis would be averted vying with uncertainty about the outlook for U.S. interest rates as the Federal ReserveFederal Reserve holds a high stakes meeting on policy.
Efforts by U.S. Treasury Secretary Janet Yellen to calm nerves seemed to be working with bank shares rallying overnight. There was no agreement on this as yet, but government officials were considering increasing the limit on deposit insurance.
There were still strains among regional U.S. banks with shares of First Republic Bank sliding on suggestions that the government might be involved in a rescue deal, perhaps disadvantaging shareholders.
The unease left S&P 500 futures and Nasdaq futures barely changed. EUROSTOXX50 futures went up 0.2%, while FTSE futures rose 0.1%.
The broadest index of Asia-Pacific shares outside Japan added 0.9%, with Chinese blue chips up 0.3%. Japan's Nikkei was up 1.6%, led by a rebound in bank stocks. The latest BofA survey of global fund managers found pessimism near its worst in the past 20 years, amid fears of financial risk and a flight from bank stocks.
The Fed is in a tough position as it decides whether to raise interest rates later today.
Goldman Sachs argues that the banking stress will cause a tightening in lending that is essentially the same as a rate hike, so a pause would be warranted.
On the other hand, analysts at JPMorgan stand by the majority and flag a rise of 25 basis points in part because postponing a move until May would threaten the Fed's inflation-fighting credibility.
They note that the Fed could still soften its forward guidance by dropping its reference to ongoing increases, much like the European Central Bank did last week.
The Fed temporarily stops selling its holdings of Treasury debt, known as Quantitative Tightening, and what do Fed members do with their dot forecasts for future rate hikes is an added complication.
The market is all over the place with regards to the policy outlook, and this will be a key focus.
Futures now imply an 86% chance of a quarter-point rise to 4.75 -- 5.0%, having even priced in the risk of a rate cut last week. The market had been wagering on a half-point hike a couple of weeks ago.
There is a chance of a cut as early as July and rates at 4.25 - 4.50% by the end of the year, but investors have swung back to expecting a further increase in May.
The course of markets for the rest of the week could be determined by how Fed Chair Jerome Powell navigates all this in his 1830 GMT news conference.
Given the wild volatility of the recent days, investors are hoping that he can instill some calm. The two-year Treasury yields were hesitant at 4.14%, having made a remarkable round-trip from 5.085% to 3.635% in just nine sessions.
European bonds have gone along for the ride. German two-year yields overnight recorded the largest daily jump since 2008, as markets went back to pricing in more ECB hikes.
It helped lift the euro to a five-week high of $1.0789 overnight, and it was last holding firm at $1.0770.
The dollar went the other way on the yen, where yields are still tightly controlled by the Bank of Japan, and rose to 132.50. Early in the week, safe-haven demand for the yen had seen the dollar as low as 130.55.
The pound fell to $1,943 an ounce and is about $2,009 compared to Monday's top in commodities. GOL Oil prices fell by a bit in early trade, after rallying 2% overnight. Brent dropped 22 cents to $75.12 a barrel, while U.S. crude fell 27 cents to $69.40.