MARKET RECOVERS FROM EARLY DROP
Rally after more bank rescue news continues tumultuous week
The week’s dizzying swings in financial markets continued Thursday as investors welcomed a group of big banks stepping in to support their smaller peer First Republic Bank, helping ease some of the turmoil emanating from regional lenders.
The S&P 500 rose 1.8 percent, after recovering from an early drop, in a rally that gained steam after news that a group of 11 banks would deposit a combined $30 billion with First Republic, which has come into investors’ crosshairs after the failure of Silicon Valley Bank.
First Republic’s stock price swung from a deep loss to a gain of more than 10 percent — a swift recovery, but one that erased only a small amount of the damage from a bruising week.
A slew of other small banks, like Western Alliance and PacWest, were also lifted by news of the intervention.
Despite the broad rally Thursday, the destabilizing volatility this week has investors braced for further stress in the financial system, stemming from the substantial shift away from a decade of low interest rates. Goldman Sachs, for example, has raised its odds that the U.S. economy could
slip into recession over the next 12 months, “reflecting increased near-term uncertainty around the economic effects of small bank stress.”
Seema Shah, chief global strategist at Principal Asset Management, said the recent bout of turmoil had served as a warning. “Until this week, markets had broadly ignored the threats that tightening policy was starting to uncover,” she said.
The broader recovery in the market Thursday also lifted shares of energy companies, which had come under pressure following a swift slide in the price of oil Wednesday. Oil prices, which are sensitive to the prospect of a global downturn sapping demand for the commodity, also rose slightly, but a
barrel of West Texas Intermediate crude, the U.S. bench mark, remained close to its lowest level since the end of 2021.
Broader markets had appeared more settled even before news of the First Republic rescue. The S&P 500 remains up for the year and is on course to close out its second-best week of 2023, absent another reversal today.
Investors had largely shrugged off a 0.5 percentage point rate increase from the European Central Bank, taking solace from a rebound in the share price of Credit Suisse, the embattled European bank, after it said it would tap a lifeline from the Swiss central bank and borrow up to $54 billion.
Central banks have been raising interest rates to try to rein in inflation, but higher rates also mean higher costs for companies, contributing to the pain experienced by some banks in recent days.
Policymakers must now balance the desire to continue slowing inf lation with the potential for it to risk further instability in financial markets. Analysts noted that the ECB’s decision took on heightened importance before the Federal Reserve’s meeting next week, and yields on U.S. government bonds rose, as investors leaned toward bets that the Fed would follow the ECB in raising its benchmark rate next week.
Still, traders in futures markets continued to bet that the Fed will cut interest rates later this year as inflation continues to fall and the economy continues to deteriorate, even though the central bank and its chair, Jerome Powell, have so far said that there are no plans to do so.
“The balance of risks has undoubtedly shifted,” noted Daleep Singh, chief global economist at PGIM Fixed Income. “The risks from too much tightening are now at least equal to, and likely larger than, the risks of doing too little. We expect Fed Chair Powell to pair a final rate hike next week with a message that Fed policy will then go on an extended pause, with the possibility of resuming rate hikes later — or initiating rate cuts — in the second half of the year.”