Analysts predicted that the Federal Reserve would pause rate hikes before its European peers due to the recent turmoil in the banking system.
The Fed decided on a 25-basis-point rate hike on Wednesday, small compared to most other increases over the past year, and hinted that the agency would soon pause the raise. Fed chairman Jerome Powell said the central bank needed to evaluate the effect of the banking crisis on the country's financial situation.
Meanwhile, the Swiss National Bank (SNB) hiked interest rates by 50 basis points on Thursday. Britain and Norway raised their interest rates by a quarter of a percentage point each. Last week, the European Central Bank (ECB) jacked up benchmark interest rates by 50 basis points.
The SNB's rate policy showed that European central bankers were more confident about their domestic banking systems than the Fed, said analysts. It is because the sharp rate hike came right after the Swiss central bank engineered a buyout for the troubled Credit Suisse. The SNB insisted that the buyout by rival bank UBS would "put a halt to the crisis."
"The Fed's dovishness shows the regional bank issue is still ongoing and will have a far bigger impact on credit conditions there than in the U.K. or Europe," Roger Lee, head of U.K. equity at wealth manager Investec, said.
Analysts said the market considered European banks to be better regulated than their U.S. counterparts, making the Credit Suisse case an anomaly within the European banking system. Investors also expect smaller U.S. banks to follow the steps of the collapsed regional lenders, Silicon Valley Bank (SVB) and Signature Bank.
Financial firm CME reported a 66.5 percent chance that the Fed would not raise the interest rate in the next policy meeting in May, maintaining the rate at the range of 4.75 to 5.0 percent.
On the other hand, banking authorities in Switzerland and Norway hinted at further monetary tightening ahead. The current monetary tightening cycle was the first one for Switzerland since 2007. Its benchmark rate currently stands at 1.5 percent.
The Bank of England is expected to increase its benchmark rate by another 25 basis points by June, which would bring the country's rate to around 4.5 percent from the current level of 4.25 percent. England still battles double-digit inflation at the moment, reporting a 10.4 percent year-over-year price growth in February.
U.S. financial markets update
The U.S. bond market was upbeat as investors anticipated a sooner pause in rate hikes by the Fed. The 10-year Treasury notes last went down to 3.402 percent, while the two-year notes tumbled to 3.8 percent. Falling yields indicated higher bond prices.
"The main takeaway is that it's likely the end is near in terms of the Fed hiking, we're seeing more priced in for rate cuts by the end of this year."
Gerard Fitzpatrick, Head of Fixed Income at Russell Investments
Russell Investments head of fixed income Gerard Fitzpatrick said he expected shorter-dated yields to fall further, which would make the yield curve steeper. The yield curve between the two-year and 10-year notes remained inverted, a common indication of recession expectation.
Meanwhile, the S&P 500 on Wall Street has gained 0.5 percent this month after concluding February in the red. However, analysts predicted that the banking sector would be a bigger drag in the equity market. Furthermore, analysts warned that some U.S. stocks were overvalued compared to their European peers, meaning that volatility would likely happen in the future.
In the currency market, the dollar index has lost 2.7 percent so far in March, after a 2.8 percent leap in the previous month. The currencies of emerging economies notably strengthen against the greenback. The South African rand has gained 1.5 percent against the U.S. currency, while the Mexican peso jumped 18 percent.