A rebound in Europe's battered banking shares was beginning to wane on Thursday, as a 50 billion Swiss franc ($53.94 billion) lifeline for beleaguered lender Credit Suisse teed up a pivotal European Central Bank interest rate decision.
Credit Suisse's shares were still up more than 20% after the Swiss National Bank and financial regulator, FINMA, had rowed in with support, but the broader European banking sector (.MIEU0BK00PEU) had given back much its 2.5% morning rally with the ECB now looming.
The SNB confirmed on Thursday that it will provide "liquidity" to the lender. Credit Suisse, which said it is taking "decisive action", will borrow up to 50 billion Swiss francs from one of the world's leading central banks.
Europe's banking stocks had suffered their steepest one-day drop in more than a year on Wednesday in the wake of the CS woes and though shares were backsliding again, bond traders at least still seemed confident enough ahead of the ECB to be selling safe-haven government bonds again.
"I worry that the ECB is not going to pay enough attention to this risk (banking sector problems) and that could be a mistake," said Stefan Gerlach, Chief Economist at EFG Bank in Zurich and a former deputy governor at Ireland's central bank.
The last week demonstrates what happens when major central banks like the U.S. Federal Reserve and the ECB raise interest rates by hundreds of basis points in a short period of time, he added.
"Whenever you do something that large, you know there is a risk waiting somewhere in the financial system," Gerlach said. "It is like stretching a rubber band, if you keep stretching it, is it going to break?"
Germany's two-year bond yield , which is highly sensitive to ECB rate expectations, was last up 18 basis points (bps) at 2.56% having plunged 54 bps on Wednesday in what had been a market-wide scramble for safety.
Overnight, Asian shares had fallen around 1% but it was largely a catch-up move and had none of the frenzy witnessed in Europe the previous day.
Wall Street futures were also pointing to a steady start there later , while demand had dropped for both the dollar and gold, the traditional go-to plays for investors during market turbulence.
