Bloomberg: US stocks rallied after a report that major banks are in talks to bolster First Republic Bank sparked a rebound in shares of embattled regional lenders. Short-dated Treasuries fell after the European Central Bank delivered a rate hike that added to bets the US central bank will raise next week.
The S&P 500 surged to session highs after the Wall Street Journal reported JPMorgan Chase & Co. was among banks that were in talks to bolster First Republic. Its shares have tumbled 70% this week as investors speculated the lender could be the next to fail after two high-profile demises touched off the crisis last week. An index of regional banks erased losses that earlier approached 4%. The tech-heavy Nasdaq indexes jumped more than 1%.
The First Republic news comes after a lifeline from Swiss regulators overnight stabilized Credit Suisse Group AG, easing worries that the European lender would lead to a cascading crisis in that region. The Cboe Volatility Index retreated below 25, though it remained above its long-term average of 20.
Markets were also digesting a European Central Bank rate hike and comments from the ECB president that inflation is projected to remain too high for too long. The Federal Reserve is expected to raise interest rates by a quarter percentage point next week. Rising odds for that move sent two-year Treasury yields back above 4%, though they remained almost a full percentage point lower than they were just a week ago.
Jessica Bemer, a portfolio manager at Easterly Investment Partners LLC, said the Federal Reserve would likely say that the ECB’s rate hike is “unrelated to their process.”
“But there’s no question that there will be heightened focus on a day like today. You’re going to see pressure on equities with the knowledge that the Fed may have no choice but to continue on raising rates,” she added.
Chris Low, chief economist with FHN Financial said, “Inertia is strong in central banking. When in doubt, they tend to continue in the direction they were already headed.”
“There were almost certainly some at the ECB in favor of a quarter-point hike, but inertia prevailed. The same is likely true to an extent with the Fed next Wednesday, especially when it comes to the Fed’s forecast and dot plot,” Low said.
All eyes are now on the Federal Reserve’s policy meeting next week, with traders debating whether the central bank will increase interest rates. Market pricing now suggests the Fed will soon pivot and will cut rates by as much as 1% by the end of the year.
Data Thursday showed first-time unemployment claims dropped more than analysts’ estimates last week, while housing starts and building permits exceeded expectations, underscoring the economic resilience that’s allowed the Fed to tighten aggressively over the past year.
“Uncertainty is very high at the moment and there’s a lot of selling because of the shock from higher volatility and other factors,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “The change in focus from inflation to growth concerns and financial stability has reversed the stock-bond correlation again. A stronger relief rally is not likely to happen before the Fed meeting.”