Marketmind: Europe, US reverse bank jitter sell-offs: will Asia follow?

© Reuters. FILE PHOTO: A man watches stock quotations on an electronic board outside a brokerage, in Tokyo, Japan, March 20, 2023. REUTERS/Androniki Christodoulou

By Stephen Culp

(Reuters) - A look at the day ahead in Asian markets from Stephen Culp.

Global market skittishness over whether contagion is afoot within the banking sector appears to be waning.

In fact, if European and U.S. markets on Monday are a prologue to Asian markets on Tuesday, investors can look forward to a rebound.

On Monday, the Hang Seng tumbled 2.7% to a three-month low and the Nikkei 225 dropped 1.4%, but the risk-off fog began to lift as the earth rotated around to Europe.

European shares reversed an early sell-off to close up 1% as bank shares rallied, and all three U.S. stock indexes ended higher, led by a 1.2% jump in the blue-chip Dow.

Safe-haven assets - gold and the greenback - were both down about 0.5% at the closing bell.

The S&P Banking index ended the session up 0.6%, but even with Monday's advance, the index has plunged 21.3% this month.

Last week's banking bloodbath culminated with the UBS buyout of Credit Suisse after financial heavy hitters in the U.S. threw a $30 billion lifeline to First Republic Bank (NYSE:FRC).

And on Monday, the Federal Deposit Insurance Corporation orchestrated an agreement for a subsidiary of New York Community Bancorp (NYSE:NYCB) to buy deposits and loans from the freshly shuttered Signature Bank (NASDAQ:SBNY).

All of which appears to have calmed fears and brought stability to the market, for now.

As central banks around the world juggle financial sector liquidity needs with their ongoing effort to curb inflation while avoiding recession, with the Federal Reserve due to convene for its two-day monetary policy meeting on Tuesday.

Market expectations regarding the size of the Fed's next rate hike to be announced on Wednesday - and indeed whether it will raise interest rates at all - are in constant flux.

At last glance, financial markets have priced in a 73.1% likelihood of a 25 basis point increase to the Fed funds target rate and a 26.9% probability of no hike at all, according to CME's FedWatch tool.

European Central Bank president Christine Lagarde insisted on Monday that the ECB has the tools to contend with financial market turbulence while fighting inflation, just days after announcing a hawkish a 50 basis point policy rate hike.

Here are a few things to watch for on Tuesday:

- Chinese President Xi Jinping and Russian President Vladimir Putin are slated to engage in formal talks regarding Beijing's proposals for a war resolution

- South Korea releases its February PPI report

- The Federal Reserve convenes for its two-day monetary policy meeting