CNBC Daily Open: After First Republic Rescue, Fears of Contagion Are Allayed (Again)

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This report is from today's CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

The banking crisis seems contained for now … again.

What you need to know today

  • The European Central Bank hiked interest rates by 50 basis points, or half a percentage point, to 3%. The move comes after — and despite — yesterday's turmoil in Europe's banking sector, caused by a sell-off in Credit Suisse. Hence, alongside its rate hike, the ECB said it would be ready to support banks if needed.

  • Smaller banks might be left out of efforts to protect the banking system. U.S. Treasury Secretary Janet Yellen said only banks that "would create systemic risk and significant economic and financial consequences" would have their uninsured deposits protected.
  • Still, U.S. stocks rode a wave of optimism. All major indexes rallied Thursday, with the Nasdaq Composite posting an extra strong showing. Asia-Pacific markets rose on Friday. Tech stocks, in particular, jumped alongside the Nasdaq. Hong Kong's Hang Seng index climbed 1.85%, lifted by Baidu's 14.31% leap and Bilibili's 8% increase.
  • China's government is establishing a new "Central Financial Commission" to strengthen the Chinese Communist Party's oversight of the finance and technology industries, the state media said on Thursday. The commission will be responsible for high-level planning in financial stability and development, according to the report.
  • PRO Markets expect the Federal Reserve to raise interest rates by a quarter percentage point next week. But there's a chance the central bank might pause hikes.

The bottom line

At the risk of jinxing the situation, fears of a wider meltdown in the banking industry, which yesterday spread from the U.S. to Europe, appear allayed (again).

That's thanks to the extraordinary number of measures that financial regulators and central banks on both sides of the Atlantic have used to shore up confidence. And those are not just empty promises. For instance, four days after the Fed introduced the Bank Term Funding Program — which lends banks money for a year in exchange for high-quality collateral — financial institutions have already borrowed $11.9 billion from the program. Whether that number exposes material weakness in banks' balance sheets is not really the point. The important thing is consumers and investors are psychologically reassured.

Wall Street was cheered by the rapid response to the banking crisis. The Dow Jones Industrial Average rose 1.17%, the S&P 500 increased 1.76% and the Nasdaq surprised by jumping 2.48% — technology stocks had a very good Thursday. Alphabet rallied 4.38%, Amazon added 3.99% and Microsoft rose 4.05%. Microsoft rallied after the company announced it would be adding artificial intelligence features, named Copilot, to apps like Word, Powerpoint and Excel. But the other tech giants probably rose because investors were betting — now that there's evidence that something's breaking in the economy — that the Fed might not be as aggressive in hiking rates. That would benefit tech firms the most.

It would also benefit the overall economy, which according to Goldman Sachs has a 35% chance of entering a recession in the coming 12 months — up from 25% before the banking crisis happened. The Fed's two mandates, to stabilize the economy and to fight inflation, are looking increasingly at odds with each other. It won't be an easy job.

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