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Banks spur European equities to rebound as contagion fears ease

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By Sruthi Shankar and Bansari Mayur Kamdar

(RockedBuzz via Reuters) – European stocks rose more than 1% on Tuesday as banking stocks lead the recovery after a series of measures to stabilize the sector, as investors hoped for less aggressive moves from the US Federal Reserve during this week’s political meeting.

The pan-European STOXX 600 edged up 1.3%, extending gains after the index sharply recouped intraday losses and closed the session nearly 1% up on Monday.

The heavy lenders indices of Spain and Italy added 2.5% each, outperforming the broader market.

The Fed’s monetary policy meeting concludes on Wednesday, with US interest rate futures prices suggesting the central bank is likely to raise interest rates by minus 25 basis points in the aftermath of the recent banking crisis.

CHART: Odds Strengthen for Fed Rate Hike 25 Basis Points https://www.ceiving.com/graphics/USA-RATES/FEDWATCH/xmpjkbnxmvr/chart.png

“It’s very tricky to call because if they pause you might think it’s good for risk assets, but at the same time if you give too many reasons for the pause it might scare the horses,” said Chris Beauchamp, lead analyst at IG Group market.

“The Fed may be sending the message that we’re not done yet, but maybe we don’t need to move as fast as we did.”

The European banking index rose 3.8%, with shares of Swiss banks Credit Suisse rising 7.3% and UBS 12.1%.

Banking stocks globally breathed a sigh of relief on Monday after UBS’s state buyout of Credit Suisse and coordinated actions by central banks to boost liquidity stoked hopes that a broader banking crisis was averted in the short term.

Meanwhile, European regulators tried to halt the rout of the AT1 market on Monday by saying that owners of this type of debt would only suffer losses after the shareholders were wiped out, unlike what happened at Credit Suisse.

Investors have been spooked by news that about $17 billion of Credit Suisse AT1 bonds will be written off as part of the bailout merger, but shareholders, who typically rank below bondholders in terms of who gets paid when a company goes bankrupt, they will receive $3.23 billion.

GRAPHIC: A trip from above in a few cents https://www.ceiving.com/graphics/GLOBAL-HEDGEFUNDS/jnpwyjaoxpw/chart.png

The European banking index fell 12.7% so far in March – the weakest sector performance this month – as the collapse of US mid-sized lenders Silicon Valley Bank and Signature Bank, as well as problems at Credit Suisse, they raised fears that a broader banking crisis was brewing.

European banks’ performance will be resilient if divergent as the economic reset begins, according to a note from S&P Global, with Credit Suisse representing an outlier.

Shares of RWE rose 1.4% after the biggest German utility promised a higher dividend and more investment to expand its core business in renewables.

Thyssenkrupp rose 4.5% after business daily Handelsblatt reported interest in its steel business.

(Reporting by Sruthi Shankar and Bansari Mayur Kamdar in Bangalore; Editing by Sherry Jacob-Phillips, Nivedita Bhattacharjee and Andrea Ricci)