An Impressive Week For Tech, Turmoil In Bank Stocks

Technology companies benefited from a turbulent week for global markets, as fears rose that the instability in the banking sector might throw the global economy into recession.

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Despite a Friday dip, the Nasdaq 100 surged 5.8% for its best week since November, as investors picked up old reliable favorites in the tech sector, like Microsoft and Alphabet, on hopes that the Federal Reserve will slow its tightening pace. For the seventh straight day, the policy-sensitive two-year yield moved more than 20 basis points as traders rebalanced rate-hike bets.

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"They've had a fantastic year thus far," Kelly Bogdanova, a vice president and portfolio analyst at RBC Wealth Management, said over the phone. "If you look at the entire tech group, values have gone down significantly, particularly in communication services, and those companies took a knock late last year."

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Despite a 1.1% loss in banking stocks on Friday, the S&P 500 gained 1.4% for the week. The banking industry fared the worst, with First Republic Bank, the latest U.S. institution to declare bankruptcy, falling more than 70% despite the larger banks extending a lifeline to the smaller lender on Thursday. Credit Suisse exacerbated the sector's troubles as Reuters reported that at least four major banks, including Deutsche Bank, were limiting their trading with the struggling Swiss firm. A regional bank index has dropped 15% in the last five days.

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"When an exceptional incident occurs and has an influence on the financial system, markets normally require more than a few days to work through it," Bogdanova said. "We can't rule out more repercussions."

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The 10-year Treasury yield decreased when inflation estimates came in lower than predicted; rates fell throughout the curve. The dollar index has fallen.

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JPMorgan Chase and Citigroup joined together on Thursday to express their support for the First Republic. While the rescue plan initially bolstered optimism, billionaire investor Bill Ackman was among those who questioned whether it would be enough to bring the crisis to a close. 

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Nevertheless, US banks drew a total of $164.8 billion from two Federal Reserve backup facilities in the most recent week, indicating increased financial pressures in the aftermath of Silicon Valley Bank's bankruptcy.

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"The Fed's rate hike cycle was already felt restrictive, so now that we have increased prospects of further bank rescues and even tighter lending rules, the growth prognosis for the economy is quite dismal," Ed Moya, senior market analyst at Oanda, said. "Next week will be crucial because markets are wondering whether the Fed will continue to tighten or, given this week's banking crisis, opt to pause."

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Markets were also absorbing the European Central Bank's 50 basis point rate rise. By stating unequivocally that stress points in the banking industry, as well as economic data, will guide future rate decisions, ECB Chief Christine Lagarde has set the stage for bond market gyrations to remain elevated for the rest of the year as traders try to figure out when the hiking cycle will end.

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Market pricing for the Fed's March 21-22 meeting has swung back and forth between another quarter-point rise and the first-rate halt in more than a year. Overnight indexed swaps in the United States are now pricing in a coin-flip possibility of a quarter-point Fed rate rise next week.

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Wall Street is still divided about how the Fed should proceed. Anastasia Amoroso, the chief investment strategist at iCapital, told Trade Algo that a Fed rate rise of 25 basis points would not go "that far."

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"They have to take a breather," Amoroso remarked. "The largest signal of confidence would be to say, we are aware of the situation, and we want to take the time to ensure we have the appropriate solution in place before we begin the rate-hiking cycle."

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The BlackRock Investment Institute believes that fractures in the banking industry will not hinder central banks from hiking interest rates further to control inflation. The ECB and the Fed are expected to "go as far as feasible to differentiate their inflation combat activities from measures to deal with bank difficulties and secure the financial system," according to a team of BlackRock analysts.

According to Jack Manley, global market strategist at JPMorgan Investment Management, a Fed respite next week might provide markets a "sigh of relief."

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According to Jack Manley, global market strategist at JPMorgan Investment Management, a Fed respite next week might provide markets a "sigh of relief."

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"Financial stability is more essential than inflation, and the Fed will have a difficult time communicating monetary policy via a damaged banking system," Manley told Trade Algo.

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Bitcoin achieved its highest level since June as part of a broader cryptocurrency rise. Other tokens, including Ether, Solana, and Polkadot, have increased in value. Oil experienced its worst week of the year so far. The color gold rose.

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