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27.03.2023: Wall Street shrugging off fears about banking crisis but stoking recession.
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Hi, dear traders! Wall Street is trying to shrug off fears and poised to open a new week on an optimistic note. There is good news that cheers up market sentiment, though the market is alert to any crack in the banking sector.
The benchmark stock indices managed to close a highly volatile session on Friday with gains. Fed policymakers’ comments made in the late New York session served as sedative pills. Investors regained optimism that enabled a modest growth in the major stock indices on Friday. The Dow Jones added 132 points or 0.41%. The Nasdaq climbed by 0.31%. The S&P 500 rose by 0.56% to close at 3,970.
The benchmark indices are poised to open a new trading week in the green. All of them traded higher, having grown by 0.3-0.6% in the New York pre-market. The S&P 500 is expected to trade in the intraday corridor between 3,940 and 4,040.
All three US stock indices opened on Friday in the red in parallel with European shares. However, Wall Street investors reversed sentiment after comments from Fed officials.
Presidents of three regional Federal Reserve banks confirmed that the US banking system was resilient. They also did not rule out further rate hikes, thus inspiring confidence in the US economy.
Besides, analysts at JPMorgan dispelled concern over problems with counterparty and liquidity issues. Shares of large American banks JPMorgan and Wells Fargo recouped their losses, though closed in the red. At the same time Bank of America logged a positive dynamic.
Shares of regional lenders such as PacWest and Western Alliance grew by 3.2% and 5.8% respectively. Shares of First Republican dropped by 1.4%.
The banking sub-index of the S&P slipped a bit on Friday whereas the index of domestic banks jumped by 2.9%. The 9 from 11 sectors in the S&P 500 closed with gains.
Despite turbulence in financial markets, all three US stock indices gained ground. Wall Street logged weekly growth last week. Moreover, the S&P 500 and the Nasdaq are on track to their quarterly growth.
First Citizens Bank said on Monday that it would purchase a stake in Silicon Valley Bank. Shares of First Citizens surged by almost 11% in the pre-market. Shares of First Republican leapt by nearly 27% after the news that the US authorities are searching for extra measures to support banks.
Shares of other regional banks such as Western Alliance and PacWest also rose by 5.4% and 9.2% respectively. Shares of JPMorgan, Citigroup, and Bank of America grew by 0.8-1.4%. Shares of European banks also recovered after a slump in Deutsche Bank’s shares last week. They regained roughly 3%. UBS shares fell by 1%.
The market response indicates its vulnerability to the news on the banking sector. It means that concerns over a broader crisis have not ebbed away yet.
The stress in the banking sector could escalate into a full-blown financial crisis and spark off a sharp slowdown, investors pin hopes for a pause in the cycle of rate hikes that could be announced by the US Fed in May.
The economic calendar is loaded with economic data, including a consumer sentiment index and the US CPI that could shed light on the Fed’s agenda.
The essence of the US problem is massive deposit withdrawals from smaller banks in favor of larger better supervised competitors. The inflow of funds expanded to a record 5.1 trillion dollars last month.
Deposits in smaller banks on the week ended March 15 contracted by 120 billion dollars and borrowings surged by 253 billion.
Analysts suggest two scenarios for regional banks: either a considerable increase in deposit rates or a sharp cut in lending that might entail a credit crisis in the economy.
The good news is that the capital flight to cash funds assured the US Fed to soften its monetary policy in the past. Now FedFunds futures indicate the odds that the US central bank will hit the pause button in May.
The Federal Reserve should adjust a decision to the banking stress on the one hand and to high inflation on the other hand. The Fed policymakers will be alert to the PCE price index for February released on Friday. The index is expected to remain at 4.7%.
A stronger-than-expected business confidence index for Germany for March festers the problems of central banks.
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