LONDON MARKET OPEN: Banks lead rise as fear of banking crisis subsides

Bank stocks were at the forefront of a stock market rebound in Europe early Tuesday, as the shotgun wedding of UBS and Credit Suisse finally restored some confidence in the financial sector.

The blue-chip index opened up 90.05 points, 1.2%, at 7,494.36. The FTSE 250 was up 242.98 points, 1.3%, at 18,738.22, and the AIM All-Share was up 4.82 points, 0.6%, at 802.04.

The Cboe UK 100 was up 1.3% at 750.02, the Cboe UK 250 was up 1.4% at 16,306.83, and the Cboe Small Companies was up 1.3% at 13,122.25.

Focus over the next two days will be on the US Federal Open Market Committee, which begins its two day policy-setting meeting on Tuesday and will announce its next interest rate decision on Wednesday at 1800 GMT.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said that the policy meeting begins ‘in the middle of a storm’ due to instability in the US banking sector, which began with the collapse of Silicon Valley Bank.

‘If the European Central Bank decision serves as a cheat sheet, the Fed could hike by 25 basis points and say that it has tools to inject liquidity in the system to contain crisis,’ Ozkardeskaya said.

According to the CME FedWatch tool, markets believe there is a 78% chance the Federal Reserve will lift US interest rates by 25 basis points on Wednesday, with the remaining 22% expecting rates to stay at their current level. Earlier this month, before the recent banking industry turmoil, a 50-point hike was considered possible.

The European Central Bank on Thursday last week stuck to its word and lifted interest rates by 50 basis points, despite the banking turmoil.

The move took the interest rate on the main refinancing operations, the interest rate on the marginal lending facility, and the deposit facility to 3.50%, 3.75% and 3.00%, respectively.

The dollar was largely stronger ahead of the FOMC meeting.

The pound was quoted at $1.2244 early on Tuesday in London, lower compared to $1.2270 at the equities close on Monday. The euro stood at $1.0731, higher against $1.0723. Against the yen, the dollar was trading at JP¥132.20, higher compared to JP¥131.47.

Francesco Pesole said Wednesday’s Fed decision would be a ‘big risk event’, and added that he wouldn’t be surprised to see the dollar find some support going into the FOMC announcement as markets turn ‘more defensive and potentially factor in a greater risk of a hawkish scenario’.

In London, banks were amongst the top performers in early morning trade as fears about the banking sector began to subside.

Barclays was up 4.6%, NatWest up 4.9%, Lloyds Banking up 3.8%, and Standard Chartered up 3.1%.

Over the weekend, UBS agreed to buy Credit Suisse in a $3.25 billion deal. The rapid talks were brokered by Swiss regulators to safeguard its banking system and attempt to prevent a crisis spreading across global financial markets. The takeover has brought a degree of calm to financial markets after the recent volatility.

Credit Suisse was up 0.3% in Zurich, though remains down 63% in the past week, while UBS was 4.8% higher, having quickly bounced back from an early morning fall on Monday.

Elsewhere, Kingfisher shares were down 0.6%. The B&Q-owner reported a sharp drop in profit in its most recently ended financial year but said the performance was in-line with its expectations and guidance against a strong comparator year.

For the financial year that ended January 31, Kingfisher reported pretax profit of £611 million, down 39% from £1.0 billion the year prior, reflecting lower operating profit and the impact of impairments following significant increases in discount rates due to higher interest rates.

Gross margin narrowed to 36.7% from 37.4% in financial 2022 amid ‘normalised promotional activity’.

‘The success during the pandemic effectively gave Kingfisher a new lease of life following years of struggles,’ commented Russ Mould, investment director at AJ Bell. ‘Like many Covid winners, the DIY group will be hoping its recent success lives on and doesn‘