Asian Markets Witnessing Gradual Recovery Post Credit Suisse Episode

Asian stocks recovered from lows on Tuesday, with the rescue of Credit Suisse halting selling in bank shares, though the mood remained fragile, and market stress had traders wondering whether US rate hikes would be completed.

In early trade, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5%. The Australian share market recovered 1.3 percent from Monday's four-month low, while the Hang Seng opened 0.7 percent higher.

Japanese markets were closed for the holiday, but Chicago-traded Nikkei futures were up.

An early selloff in Europe was reversed overnight, and the S&P 500 rose 0.9% on Wall Street. In early Asia trade, US futures rose 0.2%.

The Swiss government-backed takeover of Credit Suisse by UBS has temporarily alleviated concerns about European financial stability. However, the annihilation of some Credit Suisse bondholders has sent shockwaves through bank debt, and persistent signs of stress at US regional lenders have investors on high alert.

"Globally, I think we're a long way from being out of the woods on this," said Brian Johnson, a banking analyst at Jefferies in Sydney, with the current stress set against a backdrop of higher capital costs and declining loan growth.

First Republic, a lender in San Francisco, appears to be an example. On Monday, its share price was cut in half amid fears that $30 billion in deposits posted by larger banks less than a week earlier would not be enough to shore up the system.

The writedown of Credit Suisse's "additional tier 1" debt to zero sparked a frenzy of selling of similar debts at other banks, as holders were taken aback that the long-standing practise of paying creditors before shareholders had not been fully followed.

This was somewhat alleviated after European and British regulators intervened to reassure investors that it would not set a precedent.

A London-listed exchange-traded fund that tracks such debts pared steeper losses on Monday, finishing 5.7 percent lower, but nerves - and higher funding costs for banks - are likely to linger.

"There is still a significant breakdown in how the credit stack functions," Johnson said.

The US dollar has stabilised in foreign exchange markets after falling overnight. It last bought 131.90 yen and is currently trading at $1.0718 per euro. Bond markets shook overnight as traders attempted to decipher what the bank stress means for interest rate policy.

Because of a holiday in Tokyo, Treasuries were not traded in Asia.

This week, central banks in the United Kingdom and the United States will meet, with the Fed meeting first on Wednesday.

Interest rate futures in the United States have priced in only one more 25 basis point hike before a series of cuts beginning as early as June. The CME FedWatch tool shows pricing implying about a 74 per cent chance of a rate hike on Wednesday.

"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.

"If the (Fed) pauses, the message may be that it sees further hikes as markets settle down. But the reality may be that a March pause effectively ends the hiking cycle if the economy slows."

In commodity markets, jitters about demand have kept Brent crude futures below $80 per barrel; they were last at $73.80. Overnight, gold reached a one-year high of $2,009 per ounce before falling to $1,979 on Tuesday.