Shares rise after Credit Suisse deal, but bank 'whack-a-mole' not over

Global shares rose on Tuesday, after the rescue of Credit Suisse arrested a rout in bank stocks, but signs of stress in the financial system are making investors wonder if another lender may deliver a nasty surprise, and how central banks might respond.

The Federal Reserve begins a two-day meeting later in the day and after a wild few sessions, US interest rate futures pricing implies that a peak in rates is either imminent or has already been reached.

Many investors had thought concerns about the stability of the banking sector were a thing of the past after the 2008 crisis. But the collapse of a number of US regional lenders, plus the eleventh-hour rescue of Credit Suisse, are forcing central bankers to prioritize fighting inflation alongside keeping money flowing through the financial system.

The jury is out on whether the Bank of England will hold fire when it meets this week, and the picture isn't much clearer for the European Central Bank, which raised rates last week, but left traders without much idea of what to expect next.

"It seems the penny is dropping, most central banks hiked interest rates too late and then raised rates too fast. And now the world is reeling with a banking crisis," Saxo Bank strategist Jessica Amir said.

European banking stocks, which are heading for their biggest one-month slide in three years, rose by almost 4% on Tuesday, helping lift the regional STOXX 600 index (.STOXX), while other measures of investor risk aversion subsided.

The Swiss government-backed takeover of Credit Suisse by UBS has helped soothe concerns over European financial stability.

But the wipeout of some Credit Suisse bondholders has sent shockwaves through bank debt markets, while the speed with which trouble spread from regional US banks to humble a big systemic bank in Europe has rattled markets.

"While the last global financial crisis played out over 18 months, today's crisis is only 10 days old and has already led to the collapse of some US regional banks and the arranged marriage of UBS and Credit Suisse at 0.06x book (value)," said bank analyst Jonathan Mott at Barrenjoey in Sydney.

"While global regulators are acting with pace, this appears to be a game of 'whack-a-mole.'"

San Francisco lender First Republic (FRC.N) is emerging as the next pressure point. Its share price halved on Monday on worries that $30 billion in deposits placed last week by bigger banks would not be enough to shore up its stability.

US officials are looking at ways to temporarily expand Federal Deposit Insurance Corp coverage to all deposits, Bloomberg News reported on Monday.

With so much tension in markets right now, gold has shot up to around $2,000 an ounce this week for the first time in year.

The dust is also yet to settle on the write-down of Credit Suisse's "additional tier 1" debt - part of its capital buffers - to zero.

It set off frantic selling of similar debt because holders were surprised that the long-standing practice of paying creditors before shareholders was not fully followed.

That somewhat abated after regulators in Europe and Britain stepped in to reassure investors that it would not set a precedent, and prices stabilized on Tuesday.

With the focus squarely on the outlook for monetary policy, the dollar held mostly steady against a basket of currencies.

Fed funds futures imply about a 1-in-4 chance of the Fed pausing on Wednesday, according to CME's FedWatch tool, while markets are divided evenly on the prospect of a hike in Britain.

"The banking sector's near-death experience over the last two weeks is likely to make Fed officials more measured in their stance on the pace of hikes," said Standard Chartered's head of G10 FX research, Steve Englander.

In foreign exchange, the dollar rose 0.7% against the yen to 132.17 and lost out to the euro, which rose 0.2% to $1.0748.

Gold meanwhile hit a one-year high of $2,009 an ounce on Monday, before easing 0.5% to $1,970 an ounce on Tuesday.