Wall Street’s Rush for Safety Wanes as Stocks Gain: Markets Wrap

(Bloomberg) — Stocks rebounded as regulators worldwide rushed to shore up market confidence over the weekend, with the recent financial turmoil spurring speculation on a slower pace of tightening from major central banks.

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An earlier bid for the safest corners of the market subsided as the S&P 500 gained and Treasuries almost erased their rally. UBS Group AG climbed as investors digested the drawbacks and potential upside of its Credit Suisse Group AG takeover. Wall Street’s biggest lenders like JPMorgan Chase & Co. and Wells Fargo & Co. came back higher. New York Community Bancorp jumped after taking over Signature Bank’s deposits and some of its loans. First Republic Bank plunged on another credit downgrade.

Just a couple of weeks ago, investors were betting the Federal Reserve would raise rates close to 6% and the European Central Bank would hike past 4%. Now markets imply the tightening cycles are almost over and wager on at least four rate cuts in the US by year-end. Overnight indexed swaps price in a 60% chance of a quarter-point hike by the Fed this week — a move that was seen as given before the banking crisis sparked.

“We expect a 25 bp hike and higher dots in the dot plot,” said Chris Low, chief economist at FHN Financial. “50 bp would be reckless, but no hike would suggest the bank crisis supplants the fight against inflation. 25 bp seems just right, given the circumstances. Of course, our view from midtown Manhattan may not be quite the same as the Fed’s from central DC, as they have eyes on banking system internals we can’t see from here. If the Fed chooses not to hike, the language they use to couch that choice in will be key to shaping the entire yield curve.”

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Market easing expectations have “run wild” because the media blackout has restrained Fedspeak, according to Win Thin at Brown Brothers Harriman. While nobody knows the extent to which market turmoil is impacting the rate hike debate, Fed officials will likely fall in line with ECB President Christine Lagarde, who last week stressed that there is no trade-off between price and financial stability.

“This was a very strong statement that suggests any banking sector issues won’t derail the tightening cycle,” he noted. “We think this view is held by pretty much every central bank, including the Fed, which supports our call for a 25 bp hike this week.

‘Vicious’

Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be the beginning of a painful and “vicious” end to the bear market in US stocks.

“This is exactly how bear markets end — an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time,” Wilson wrote.

To Keith Lerner at Truist Wealth, relative to the news flow and erratic swings, the overall market has been fairly resilient.

“Although a Fed pause or pivot could trigger a short-term rally, we don’t see this as a cure-all, especially if the economy falls into recession later this year,” Lerner added. “The Fed’s reaction function to current events will likely be less aggressive in providing monetary support relative to past periods given the conundrum of still-elevated inflation. We stay defensive.”

The failure of three lenders at home and a spiraling banking crisis in Europe have bent the US stock market, but didn’t break it — so far. Beneath the surface, the firms with the shakiest finances are trailing their sturdiest peers by a magnitude seen few times before.

Dividing the Russell 1000 Index into four baskets based on the level of debt load compared with market capitalization shows how wide the gap has become. The basket of firms with the highest credit burden fell 3% last week, trailing a basket with the healthiest finances by 4.8 percentage points. Since 2008, the gap was higher in just two instances – the climax of the pandemic rout in March 2020 and the week Lehman Brothers went under in September 2008.

Turmoil in the banking sector, hotter-than expected inflation data, and renewed hopes for a dovish Federal Reserve has Bitcoin reaching levels not seen in about nine months. The largest digital coin topped $28,000 for the first time since June. Bitcoin is now up more than 70% since the start of the year. Other tokens have rallied as well, with Ether gaining almost 50% since Dec. 31 and Solana, one of last year’s most beaten-down coins, more than doubling.

Key events this week:

• US existing home sales, Tuesday

• US Treasury Secretary Janet Yellen to appear at Senate subcommittee hearing, Wednesday

• FOMC rate decision, news conference from Chair Jerome Powell, Wednesday

• EIA crude oil inventory report, Wednesday

• Eurozone consumer confidence, Thursday

• BOE interest rate decision, Thursday

• Swiss National Bank rate decision and press conference, Thursday

• US new home sales, initial jobless claims, Thursday

• US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday

• Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday

• US durable goods, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2% as of 9:30 a.m. New York time

• The Nasdaq 100 fell 0.2%

• The Dow Jones Industrial Average rose 0.3%

• The Stoxx Europe 600 rose 0.5%

• The MSCI World index rose 0.1%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%

• The euro rose 0.5% to $1.0722

• The British pound rose 0.6% to $1.2245

• The Japanese yen rose 0.3% to 131.39 per dollar

Cryptocurrencies

• Bitcoin rose 0.6% to $28,156.09

• Ether fell 1.1% to $1,778.82

Bonds

• The yield on 10-year Treasuries declined two basis points to 3.41%

• Germany’s 10-year yield declined two basis points to 2.09%

• Britain’s 10-year yield declined two basis points to 3.26%

Commodities

• West Texas Intermediate crude fell 0.7% to $66.29 a barrel

• Gold futures rose 0.6% to $2,002.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

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