Investors liked the message the ECB would take a data-driven approach on raising interest rates further

New York (AFP) - Wall Street rallied Thursday on reports that private US banks were in talks to save First Republic Bank while European stocks jumped as the European Central Bank lifted interest rates but took a somewhat “dovish” tone for the future.

Shares of beleaguered First Republic did a dramatic U-turn from down more than 30 percent to up around 12 percent following reports that JPMorgan Chase, Bank of America and other private giants were negotiating over pumping billions of dollars to shore up the California bank.

Major US indices, which had opened the day in the red, also pushed into positive territory, with the S&P 500 up around 1.5 percent.

“The idea of a private sector-led solution for First Republic’s issues led to a relief rally in the equity market,” said

The reversal in New York followed a rebound in European stocks as markets digested the ECB’s move.

Investors had hoped the European Central Bank would reduce the amount of its rate hike, or even pause it over fears about the health of Credit Suisse and the wider banking system following the implosions of two US lenders.

But the central bank raised its main rates by half a percentage point, as it had previously pledged to do.

It did, however, drop a reference – used in previous statements – to the need to raise rates “significantly” going forward and ECB chief Christine Lagarde refused to commit to further rate hikes although she said more were needed.

Stock markets seesawed following the ECB’s announcement.

European shares, which had risen earlier on relief that troubled banking giant Credit Suisse had secured a financial lifeline, initially fell but then quickly rebounded.

“Investors have viewed this as a ‘dovish hike’ from the ECB, as the bank indicates that it is shifting to an entirely data-dependent approach,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.

Dovish in monetary policy means favouring lower interest rates to maximise growth and employment, rather than pursuing a “hawkish” policy focused on raising interest rates to reduce inflation.

The half-percentage-point “hike sends a clear signal of confidence in the strength of the European banking sector,” Ryan added.

Frankfurt closed up 1.6 percent and Paris advanced two percent. London rose 0.9 percent.

A day after hitting a record low, Credit Suisse rallied after it announced it would borrow up to $54 billion from Switzerland’s central bank.

Its shares soared more than 30 percent at the open Thursday. They finished the day up just over 19 percent.

“We’re not seeing too many jitters in the markets at this point but they can obviously materialize at any point,” said Craig Erlam at OANDA trading group.

For him, “the real test will come from how European banks trade over the hours and days ahead.”

Other European banking giants including BNP Paribas and Commerzbank were also in the green, though Societe Generale and Deutsche Bank fell.

The ECB rate hike is the first by a major central bank since markets were rocked by banking crisis fears, testing the eurozone institution’s resolve to implement another hefty increase.

There is also much debate over whether the US central bank will continue with its rate tightening campaign.

The collapse of California lender Silicon Valley Bank has been widely linked to the sharp rise in borrowing costs over the past year.

Some commentators expect US Federal Reserve officials to lift rates once more next week but possibly hold afterwards, while there is a growing belief it could even announce cuts before the end of the year.

But the ECB’s decision will also likely impact the thinking of Fed policymakers, said Naeem Aslam, chief investment officer at Zaye Capital Markets.

“The fact that the ECB has increased the rate by 50 basis points, the chances are now that the Fed is going to do the same as well,” he said.

- Key figures around 1800 GMT -

New York - Dow: UP 1.0 percent at 32,193.07

New York - S&P 500: UP 1.5 percent at 3,949.78

New York - Nasdaq: UP 2.1 percent at 11,672.68

London - FTSE 100: UP 0.9 percent at 7,410.03 (close)

Frankfurt - DAX: UP 1.6 percent at 14,967.10 (close)

Paris - CAC 40: UP 2.0 percent at 7,025.72 (close)

EURO STOXX 50: UP 2.0 percent at 4,116.98 (close)

Tokyo - Nikkei 225: DOWN 0.8 percent at 27,010.61 (close)

Hong Kong - Hang Seng Index: DOWN 1.7 percent at 19,203.91 (close)

Shanghai - Composite: DOWN 1.1 percent at 3,226.89 (close)

Euro/dollar: UP at $1.0599 from $1.0577

Pound/dollar: UP at $1.2109 from $1.2057

Euro/pound: DOWN at 87.48 pence from 87.72 pence

Dollar/yen: UP at 133.61 yen from 133.42 yen

West Texas Intermediate: UP 2.2 percent at $69.11 per barrel

Brent North Sea crude: UP 1.9 percent at $75.08 per barrel