Jittery markets attempt risk-on rally while waiting for Powell

A look at the day ahead in European and global markets from Ankur Banerjee

With about 12 hours still to go before the Fed announces its policy decision, investors are attempting a bit of a risk-on rally.

Comments from U.S. Treasury Secretary Janet Yellen, who told bankers that she was prepared to intervene to protect depositors in smaller banks, have helped calm some of the market’s nerves, even as a scramble by embattled U.S. lender First Republic Bank to secure a capital infusion kept worries about the sector alive.

The collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to surging interest rates, kicked off a tumultuous 10 days for banks, with fears of a global meltdown rattling investors.

And that brings us to the main event of the day: the Fed’s policy meeting, which concludes on Wednesday with the 2 p.m. EDT (1800 GMT) release of a policy statement followed half an hour later by a news conference by Chair Jerome Powell.

Traders are pricing in an 85% chance of a 25 basis-point interest rate hike by the Fed and a 15% chance of no increase. Just a month earlier, the market was pricing in a 24% chance of a 50 basis-point hike.

The past two weeks have upended expectations, with market funding conditions tightening sharply since the collapse of Silicon Valley Bank and a rout in Credit Suisse shares that led to a shotgun takeover on Sunday by Swiss rival UBS.

Whether that’s enough for central banks to stop hiking remains to be seen.

The MSCI ex-Japan index rose 1.3%, while the dollar and gold traded in narrow ranges. Futures indicated European stocks would likely join in on the rally.

In the corporate world, GameStop posted a surprise profit for the fourth quarter, its first since early 2021, sending the “meme stock” nearly 50% higher. Shares of another meme stock, Bed Bath & Beyond, fell below $1, leaving the retailer at risk of losing additional funding from hedge fund Hudson Bay Capital Management. The retailer reached an amended agreement with Hudson last week to temporarily lower the stock price threshold to $1 until April 3. Graphic: Traders bet on rate hike as fears of bank crisis ease Traders bet on rate hike as fears of bank crisis ease, https://www.reuters.com/graphics/USA-RATES/FEDWATCH/xmpjkbnxmvr/chart.png

Key developments that could influence markets on Wednesday:

Economic events: UK inflation, US Fed policy decision (This story has been corrected to say that the market is pricing in 85% chance of 25 bps hike and 15% chance of no increase in paragraph 5)

(Reporting by Ankur Banerjee; Editing by Edmund Klamann)