Morning Bid: Add credit risk to a bubble, and stand well back

A look at the day ahead in European and global markets from Stella Qiu

It was already a troubling set-up for stocks, with valuations stretched, the whiff of an AI bubble, a shut U.S. government and the ongoing break-up between Washington and Beijing. Now, add in jitters about U.S. regional banks.

Overnight, Zions sank 13% after disclosing it would take a $50 million loss in the third quarter on two loans from its California division. Western Alliance's stock slumped 11% after it initiated a lawsuit alleging fraud by Cantor Group V, LLC.

The banks' selloff comes more than two years after Silicon Valley Bank's 2023 failure, when high interest rates drove paper losses on its bonds, sparking a fatal deposit run that felled Signature Bank days later.

Worries of a repeat drove shares in the red and had markets baying for more U.S. rate cuts. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9% on Friday and Japan's Nikkei slid 1.1% as its banking index tumbled.

Wall Street futures fell 0.4% ahead of more earnings from U.S. regional banks later in the day. European stock futures lost 0.8%, while FTSE futures dropped 1%.

The flight to safety saw gold hit a record of $4,378.69 per ounce and was poised to finish the week 8.9% higher - the biggest weekly rise since September 2008 when the collapse of Lehman Brothers fuelled the global financial crisis.

How is that not ominous?

Treasuries also found their safe-haven mojo back, rallying for a third straight week. Two-year Treasury yields hit a fresh three-year trough of 3.3890% as investors bet the Federal Reserve will have to cut rates twice by year end, with some chance of an outsized 50 bps move.

While financial stability risks seem contained for now, Jamie Dimon has said "When you see one cockroach, there are probably more, and so everyone should be forewarned."

Investors assume the Fed will ride to the rescue, because of course it will. But cutting rates when inflation is at 3% and the full impact of tariffs on prices is only starting to be felt could be just a taster of what to expect when Trump gets to appoint his very own Fed chair.

Key developments that could influence markets on Friday:

- Little data released as US government is shut

- Fed official Alberto G. Musalem speaks, as well as Bank of Japan's Deputy Governor Shinichi Uchida

- US earnings include American Express, State Street and more regional banks

(Editing by Muralikumar Anantharaman)