Friday, March 17, 2023 7:25 a.m.
U.S. stocks rallied on Thursday after a group of big banks offered a lifeline to the bank investors had focused on in their hunt for the industry’s next casualty.
The S&P 500 jumped 1.8% on its best day in nearly two months after 11 of the biggest banks announced they would deposit a total of $30 billion in First Republic Bank.
The Dow Jones Industrial Average erased an early 300-point loss to climb 371 points, or 1.2%, while the Nasdaq composite jumped 2.5%.
It’s been a whirlwind week for markets around the world on fears that banks will bend under the weight of the fastest round of interest rate hikes in decades.
Concerns have erupted since Friday’s collapse of Silicon Valley Bank, which was the second-largest bank failure in US history.
Since then, Wall Street has attempted to root out banks with similar characteristics, such as many depositors with more than the $250,000 limit insured by the Federal Deposit Insurance Corp, or many tech start-ups and other highly that can quickly spread concerns about a bank’s soundness.
First Republic Bank was at the center of market pivots, and it rose 10% on Thursday after falling 36% at the start of the day.
In the statement announcing their deposits, the group of 11 banks said the move “reflects their confidence in the First Republic and in banks of all sizes”.
This includes Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY-Mellon, PNC Bank, State Street, Truist and US Bank
Besides equities, Treasury yields also firmed suddenly following early reports of a possible bailout by the industry. This was a sign of increased confidence from the bond market.
The Bank of England and the Treasury have been approached for comment.
Following the collapse of the technology industry Silicon Valley Bank, UK contagion fears led HSBC to take its UK branch for just £1.
Will this have an impact on Europe?
Across the Atlantic, European equities rallied after the The European Central Bank announced a sharp increase at interest rates. Concerns were also easing about another bank, Credit Suisse, which helped push markets down on Wednesday.
The meeting taking place in the middle of a nervous backdrop in the banking sector, said ECB President Christine Lagarde “there is no compromise between price stability and financial stability”.
THE Swiss bank was struggled with issues for years, but its fall to an all-time high raised concerns just as greater attention shone on the wider industry.
Shares of Credit Suisse in Switzerland jumped 19.2% on Thursday after announcing it would bolster its finances by borrowing up to 50 billion Swiss francs (£45 billion) from the Swiss National Bank.
Much of the damage to banks is seen as the result of the Federal Reserve’s fastest barrage of interest rate hikes in decades. They shocked the system after years of historically easy conditions in hopes of bringing down painfully high inflation.
Higher rates can keep inflation in check by slowing the economy, but they increase the risk of a later recession. They also hurt the prices of stocks, bonds and other investments. This last factor has been one of the issues that has hurt Silicon Valley Bank, as high rates have depressed the value of its bond investments.
U.S. Treasury Secretary Janet Yellen told a Senate committee on Thursday that the country’s banking system “remains strong” and that Americans “can be confident” about their deposits.
Impact on rate hike
Wall Street is increasingly expecting this week’s turmoil to push the Federal Reserve to raise interest rates next week by just a quarter of a percentage point.
This would be the same increase as last month, and it would go against expectations at the start of the month for a 0.50 point rise, as this had potentially been a signal.
The European Central Bank raised its key rate by half a percentage point on Thursday, dismissing speculation that it could cut in size due to all the turmoil around banks.
Some of the wildest action on Wall Street this week has been in the bond market, as traders race to guess where the Fed is headed.
The 10-year Treasury yield rose to 3.57% from 3.47% on Wednesday night. Earlier in the day it fell to 3.37% and has veered sharply since surging above 4% at the start of the month. It helps set the rates for mortgages and other large loans.
All the strains in the banking system have raised fears of a potential recession due to the importance small and medium banks are placing on lending to businesses across the country. Oil prices have slipped this week on such fears.
Reports on the US economy, meanwhile, continue to show mixed signals.
The job market remains mixed
The labor market looks remarkably strong and a report indicates that fewer workers applied for unemployment benefits last week than expected.
But other pockets of the economy continue to show weakness. Manufacturing struggled, for example, and a measure of activity in the mid-Atlantic region weakened more than expected.
The housing market also suffered from the brunt of rising mortgage rates, although homebuilders launched more projects last month than expected. This could be a signal that the industry is finding some stability.
In total, the S&P 500 rose 68.35 points to 3,960.28. The Dow gained 371.98 to 32,246.55 and the Nasdaq jumped 283.22 to 11,717.28.
Press Association – Stan Choe, Associated Press