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As Bank Anxiety Grows, Stocks Sink And Bonds Rally

March 17, 2023
minute read

The financial sector turmoil rocking the global economy is threatening to tip the global economy into recession, contributing to stock markets falling on Friday while Treasuries rising.

A major part of the S&P 500 dropped as much as 1.7% intraday, reversing the previous day's climb as larger banks threw a lifeline to First Republic Bank, the latest US lender to acknowledge that it was under stress. All the major US indexes lost more than 1% intraday, with the S&P 500 dropping as much as 1.7%. The decline in First Republic wasn't abated by that, however. An index of regional lenders also declined by more than 10% this week, which reflects a decline in the whole sector as a whole. In the benchmark, FedEx Corp. surged around 9% after it raised its profit forecast, which was one of the bright spots on the index.

There was a waver between gains and losses earlier in the session for the Nasdaq 100. It is expected that the Federal Reserve will temper its tightening path, resulting in the rates-sensitive gauge heading for its best week since November. An unexpectedly weak inflation expectation reading pushed down the yield on 10-year Treasury notes. There was a decline in the dollar index. 

It's possible that Friday's quarterly triple witching, which will see equity index options, stock options, and index futures contracts all expire, will cause the market to swing.

First Republic received support on Thursday from JPMorgan Chase & Co. and Citigroup Inc. Ackman, a billionaire investor, doubted whether the rescue would be enough to halt the crisis despite the initial boost in sentiment. The failure of Silicon Valley Bank has intensified the funding strains for US banks, with a combined $164.8 billion borrowed from two Federal Reserve backstop facilities last week.

As the Fed's rate hike cycle already felt restrictive, Ed Moya, a senior market analyst at Oanda, wrote that the economy's growth outlook is rather bleak with the rise in bank bailouts and tighter credit standards. Markets will be very busy next week as it is unclear whether the Fed will continue its tightening cycle or hold the pace given this week's banking turmoil.

A decline of 13% was recorded on the Stoxx Europe 600 index as shares in Credit Suisse Group AG, the troubled Swiss lender, resumed a downward trend after a forced combination with UBS Group AG was ruled out. Following the intervention of the Swiss central bank on Thursday, the stock surged 19%. 

Additionally, the European Central Bank hiked its interest rates by 50 basis points. The ECB Chief Christine Lagarde, who made it clear that future rate decisions will be based on both stress points within the banking industry as well as economic data, set the stage for bond market gyrations to persist as traders attempt to determine when the interest rate hike cycle will end for the remainder of the year.

For six straight sessions through Thursday, two-year yields have been whipsawing at least 20 basis points each day as traders rebalanced their rate-hike bets. A quarter-point hike is expected, and the Fed will take the first-rate pause in more than a year at its March 21-22 meeting. Fed rate hikes at the quarter-point level are now priced into overnight US-indexed swaps at about 60% probability. 

Despite the central bank's recent moves, Wall Street remains divided. Amoroso, iCapital's chief investment strategist, said a Fed rate hike of 25 basis points wouldn't go "that far."

Amoroso said that they need to pause. "The best way to show confidence would be to say, we understand the issue. Before we resume rate hikes, we want to ensure we have the right approach in place."

Central banks will not be deterred from raising rates further to contain inflation even if the financial sector cracks. A team of BlackRock analysts wrote in a note that the ECB and the Fed ought to distinguish their inflation-fighting campaigns from those aimed at dealing with bank troubles and safeguarding the financial system as much as possible.

JPMorgan's global market strategist Jack Manley believes markets will breathe a sigh of relief next week as a result of some sort of Fed reprieve.

It will be hard for the Fed to transmit monetary policy through a broken banking system if financial stability is more important than inflation, Manley said on Bloomberg television.

In addition to Bitcoin, other cryptocurrencies including Ethereum, Polkadot, and Solana have surged. Oil is on course to experience its worst week since June. Gold is higher.

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Adan Harris
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