U.S. Stocks Rise On Rally In Bank Shares

Traders expect a 0.25-percentage-point increase in Treasury yields before Wednesday's interest rate announcement

‍

U.S. stocks rose Tuesday amid increased investor optimism about the bank system, with First Republic Bank FRC up 3.20 percent. However, the broad market rally was led by shares of a variety of regional banks, including First Republic Bank FRC up 3.20%.

‍

For the first time since Silicon Valley Bank and Signature Bank collapsed less than two weeks ago, the S&P 500 posted its second consecutive day of gains bolstered by reassuring comments by global financial authorities.

‍

Investors pared back recent bets that a slowing economy could force the Federal Reserve to start cutting interest rates in the near future, which has also led to sharp increases in the yields on U.S. government bonds-with the two-year Treasury yield climbing to its highest point since 2009.

‍

Dow Jones Industrial Average gained 316.02 points, or 1%, to 32560.60 and Nasdaq Composite climbed 184.57 points, or 1.6%, to 11860.11. The S&P 500 gained 51.30 points, or 1.3%, to 4002.87.

‍

KBW Bank index rose by 5%. The share price of shares in major U.S. banks such as JPMorgan Chase surged, while some smaller lenders surged as well. A number of banks have experienced significant gains this week, including JPMorgan Chase, while some smaller banks posted strong gains as well. On Monday, First Republic's stock lost nearly half its value, but then jumped $3.59, or 29%, to $15.77. Western Alliance and PacWest, two other mid-size banks that have suffered from pressure, climbed almost 14%.

‍

Interest rates from the Fed will be decided on Wednesday. Stocks advanced ahead of the announcement. When it was thought that the central bank would raise interest rates by 0.5 percentage points this month, investors have recently been contemplating whether the officials would raise interest rates by a more modest 0.25 percentage point this month or refrain from raising interest rates until the financial conditions stabilize.

‍

She suggested that, if necessary, the government could take further steps to shore up the banking system, adding to Tuesday's rally. The Federal Reserve implemented a new lending program to help banks meet withdrawal requests earlier this month, with the help of Ms. Yellen and other federal regulators. 

‍

According to Ms. Yellen, an intervention like ours was necessary to preserve the stability of the U.S. banking system.

‍

Congress may not be able to pass an extension of deposit insurance, despite calls by some banking-industry representatives and lawmakers for it.

‍

A new effort to stabilize the First Republic is being led by JPMorgan CEO Jamie Dimon, according to Trade Algo. Due to the run on Silicon Valley Bank, investors have become worried that a flight of deposits from midsize banks could cause a slowdown in lending and slow down the economy.

‍

According to Principal Asset Management's Seema Shah, chief global strategist, the equity market is not pricing in a full banking crisis. "There is no panic setting in among investors."

‍

UBS's stock jumped 12% to 19.43 Swiss francs Monday after choppy trading Monday caused by the emergency takeover of Credit Suisse by UBS. Bank stocks and bonds also climbed following UBS's takeover of Credit Suisse.

‍

Credit Suisse's AT1 bonds were wiped out as part of a hastily arranged sale to rival UBS, causing bond investors to panic. Regulators attempted to soothe investors Monday after a risky type of bank debt tumbled.

‍

One Invesco exchange-traded fund that holds roughly $1 billion of tier 1 bonds gained 16 cents, or 0.8%, to $20.86 Tuesday.

‍

During the same time period, investors were intensely focused on the banks, which made the Fed loom larger in their minds.

‍

There has been some debate in recent days about whether the Fed will raise interest rates on Wednesday due to turmoil in the banking sector. However, there seems to be a growing consensus that rates will still be raised by 0.25 percentage points.

‍

A Trade Algo report showed investors pricing in an 86% chance that the central bank will raise interest rates for a second consecutive time by 0.25 percentage points on Tuesday afternoon.

‍

At RBC Capital Markets, Blake Gwinn, head of U.S. rates strategy, agrees that the Fed will likely hike 25 basis points tomorrow. It's not necessarily the right option, but I just think...they really want to separate out the inflation-fighting toolkit from the financial stability toolkit.”

‍

Markets could also be affected by Fed officials' future plans as well as their interest rate decision.

‍

The Fed's chairman, Jerome Powell, is arguably less concerned about financial stability than investors, which could lead to stock declines, analysts say.

‍

Trade Algo reports that prices of U.S. Treasurys fell sharply Tuesday, increasing their yields, a sign that investors were already recalibrating their interest-rate bets.

‍

Trade Algo data shows that the yield on the two-year U.S. Treasury note increased from 3.922% a day earlier to 4.175%.

‍

Yields on both bonds remain well below their levels from two weeks ago, with the 10-year note yield rising to 3.603% from 3.477% on Monday.

‍

According to some investors, the bond market may be complicated by Wednesday's interest rate decision and accompanying economic projections.

‍

In response to Fed guidance that suggests higher interest rates are on the way, bond prices typically fall. It is possible, however, in the current climate, that longer-term bonds could rally if investors were sufficiently concerned that higher interest rates would drive a recession quickly, which could result in a rally in those bonds.

‍

"I think markets will just look at that and just say'Man, this is going to break,' if Fed officials are putting blinders on and hiking their way through this," said Gwinn.