By Chris Prentice and Amanda Cooper
NEW YORK/LONDON (Reuters) -Global shares stemmed a five-session rout on Tuesday as bank shares rebounded and closely-watched U.S. inflation data was in line with expectations, bolstering bets of a smaller interest rate hike by the Federal Reserve at its meeting next week.
Bond yields in the U.S. and the euro zone rose after plunging the previous day, curbing a crisis-driven rally in gold.
Crude oil futures dropped over 4% to a three-month low.
Data showed the U.S. Consumer Price Index (CPI) rose 0.4% in February versus 0.5% a month earlier. On a yearly basis, it rose 6.0% in February, compared with 6.4% in January.
U.S. Treasury yields moderately extended gains following the data, indicating some expectation that the Fed could continue to raise rates but at a gradual pace. [US/]
“The CPI report although in line and not perfect did not scream that they have no choice but to raise. The Fed still has options, which is a good thing,” said Jamie Cox, managing partner for Harris Financial Group in Richmond, Virginia.
Tuesday’s broad gains in equity markets signaled a “relief rally,” he said.
The Dow Jones Industrial Average rose 336.26 points, or 1.06%, to 32,155.4, the S&P 500 gained 64.8 points, or 1.68%, to 3,920.56 and the Nasdaq Composite added 239.31 points, or 2.14%, to 11,428.15.
All 11 major sectors in the S&P 500 ended the trading day higher.
U.S. bank stocks jumped, recovering some ground after the failure of Silicon Valley Bank and Signature Bank triggered heavy selling by investors.
European shares closed up 1.53%, notching their largest one-day gain since December and marking the first gain in four sessions. [.EU]
European banks rebounded 2.5%, one day after their largest one-day sell-off in over a year.
The MSCI All-World index reversed early losses to advance 0.84%, gaining for the first in six sessions.
As recently as a week ago, investors were just recovering from a reality check that prompted many to assume rates around the world were likely to head much higher and stay there for longer than previously expected.
“The 50-basis-point hikes are off the table for now. Markets are too fragile,” Harris Financial Group’s Cox said in a phone interview.
In under a week, three U.S. banks have collapsed. It was the failure of technology-sector lender Silicon Valley Bank (SVB) that rattled investor confidence and triggered a rush into safe-haven assets like bonds and gold.
On Tuesday, ratings agency Moody’s cut its outlook on the U.S. banking system to “negative” from “stable.”
Banking stocks around the world have shed hundreds of billions of dollars in value in a matter of days, while the government bond market has seen one of its biggest rallies in decades.
In afternoon trading, U.S. Treasury two-year yields rose 19.5 basis points (bps) to 4.225%, while the benchmark 10-year yield gained 12 bps at 3.637%. The yield curve extended its inversion in the wake of the CPI data as investors started to price in a rate hike next week.
Germany’s two-year yield rose to 2.883% after falling by 37 basis points a day earlier.[GVD/EUR]
Expectations for the peak of the ECB deposit rate dropped to around 3.4% on Monday from 4.1% last Thursday, with markets betting central banks would soften their policy stance as they assess financial stability risks.
The euro was up 0.01% on the day, having gained 1.51% in a month, while the dollar index, which tracks the greenback against a basket of currencies of other major trading partners, retreated 0.01%.
The dollar rose 0.77% against the yen, with the yen pressured as recent safe-haven flows and Treasury yields reversed.
Gold’s safe-haven rally also dried up on Tuesday in the face of higher Treasury yields. Spot gold prices were last down 0.5% at 4:%1 p.m. EDT (2051 GMT). U.S. gold futures finished down 0.3% at $1,910.90.
Oil prices were down on lingering concerns that a fresh financial crisis could reduce future oil demand.
Brent futures, the global benchmark, fell 4.1% to settle at $77.45 a barrel, while U.S. crude settled down 4.6% at $71.33.
They were the lowest closes for both benchmarks since Dec. 9 and their biggest one-day percentage declines since early January. In addition, both contracts fell into technically oversold territory for the first time in weeks.
Bitcoin hit a nine-month high, taking gains past 30% in four sessions.
New York’s financial regulator said its decision to close Signature Bank had “nothing to do with crypto.”
(Reporting by Tom Westbrook Editing by Sonali Paul, Mark Potter, Leslie Adler and Daniel Wallis)