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Banks Spur Rebound in Europe Stocks, Contagion Fears Recede

  • European banks rally over 3%
  • Investors price in 25 bps rate hike by Fed
  • Thyssenkrupp climbs on report of interest in steel division

March 21 (Reuters) - European shares rose over 1% on Tuesday, with banking stocks leading the recovery following a raft of measures to stabilise the sector, while investors hoped for less-aggressive moves by the U.S. Federal Reserve at its policy meeting this week.

The pan-European STOXX 600 climbed 1.4%, extending gains after the index sharply recouped intraday losses and closed the session up nearly 1% on Monday.

The Fed's monetary policy meeting ends on Wednesday, with U.S. interest rate futures pricing suggesting that the central bank is likely to hike interest rates by a smaller 25 basis point in the aftermath of the recent banking crisis.

Europe's banking index jumped 3.1%, with shares in Swiss banks Credit Suisse slipping 0.6% and UBS gaining 3.6%.

Banking stocks globally breathed a sigh of relief on Monday after UBS's state-backed takeover of the 167-year-old Credit Suisse and coordinated actions by central banks to boost liquidity raised hopes that a wider banking crisis was averted in the near-term.

"With no new troubles in the banking sector for the past 24 hours, markets are hoping that's a sign the crisis could have peaked," said Russ Mould, investment director at AJ Bell.

"The Federal Reserve's next interest rate decision tomorrow still has the potential to kick up a fuss if the market thinks it is being too aggressive with rate rises."

Meanwhile, European regulators tried to stop the AT1 market rout on Monday saying owners of this type of debt would only suffer losses after shareholders have been wiped out - unlike what happened at Credit Suisse.

Investors were spooked by news that some $17 billion worth of AT1 Credit Suisse bonds will be written down to zero as part of the rescue merger but shareholders, who usually rank below bondholders in terms of who gets paid when a company collapses, will receive $3.23 billion.

Europe's banking index is down more than 13% so far in March - the weakest sectoral performer this month - as the collapse of U.S. mid-sized lenders Silicon Valley Bank and Signature Bank as well as troubles at Credit Suisse raised worries that a broader banking crisis was brewing.

Shares of RWE rose 1.7% after Germany's biggest utility pledged a higher dividend and more investments to expand its core renewables business.

Thyssenkrupp climbed 5.5% after business daily Handelsblatt reported of interest in its steel business.

Reporting by Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips and Nivedita Bhattacharjee

Source: Reuters

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