Wall Street closed higher after regulators pushed back on two big banks over the weekend and made other moves to rebuild confidence in the struggling industry. The S&P 500 rose 0.9% Monday. The Dow and Nasdaq also rose. Financial stocks were among many to rise.
A lot of attention has been on the banks as they may be cracking down on the fastest series of interest rate hikes in decades. Regulators announced a deal on Sunday in which Swiss banking giant UBS will buy rival Credit Suisse. Treasury yields also rose ahead of an upcoming decision on interest rates by the Federal Reserve on Wednesday.
UBS shares rose 1.3% in Switzerland, while Credit Suisse fell 55.7%.
A group of central banks from the United States to Japan also announced coordinated moves on Sunday to ease the strain on the financial system. They should allow banks to have more access to US dollars if they need it, an echo of practices commonly used in previous crises.
The movement does not mean that the crisis of the banking industry is over, but “it is one of the troublesome aspects of the table,” said Ryan Detrick, chief market strategist at the Carson Group.
The latest announcement on Sunday by regulators may sound like the 2007-08 financial crisis that devastated the global economy, but many investors see a big difference between then and now. One is that stocks generally rose after the announcement.
“There’s still a lot out there” in terms of potential problems, “but that’s what we’re going to do,” Detrick said. “The market is trying to digest: Is this just a few financial companies that have made bad decisions, or is it all a house of cards? We are optimistic that there are many banks in a bad situation but not the whole system.
In the US, most of the attention has been on smaller and mid-sized banks because of fears that falling confidence could push depositors to pull their money together. This is called a bank run, and the move can topple it.
First Republic Bank has been in the crosshairs of investors in the hunt for the industry’s next victim following the second and third largest US bank failures in history. The stock fell 45.6% after S&P Global Ratings cut its credit rating for First Republic for the second time since Wednesday.
S&P said it was able to downgrade the rating despite a group of the largest US banks announcing last week they would deposit $30 billion as a sign of faith in First Republic and the wider banking industry.
While the money certainly helps, “it may not solve the many business, liquidity, funding and profitability challenges that we believe banks are currently facing,” the credit rating agency said.
Shares of other small and medium-sized banks, meanwhile, were much stronger.
New York Community Bancorp jumped 33.4% after agreeing to buy most of Signature Bank in a $2.7 billion deal, the Federal Deposit Insurance Corp. Signature Bank became the industry’s third-biggest failure earlier this month after regulators seized it.
Many other US stock markets have also been pushed higher, but how long that will last is a question mark. A big decision will be on the calendar by the Federal Reserve.
The US central bank will announce its latest move on interest rates on Wednesday. For some time, Wall Street is betting that the increase will accelerate due to persistently high inflation.
Higher rates may reduce inflation by slowing the economy, but they will increase the risk of a recession later. They also hurt the prices of stocks, bonds and other investments. This is one of the factors behind Silicon Valley Bank, which earlier this month became the second largest US bank failure in history. Bonds owned by banks and others have seen their value plummet as interest rates soared.
The Fed has pulled the key overnight rate to a range of 4.50% to 4.75%, from near zero at the start of last year.
But all the new stress in the banking system has pushed Wall Street to believe that the Fed is unlikely to pick up the pace again in its rate hikes. However, inside it is likely to stick with an increase of 0.25 percentage points, according to data from the CME Group.
Many economists and investors have been expecting at least a mild recession to hit the US economy because of all the recent rate hikes. The worry is that the strain for regional banks can increase the risk further. This is due to the importance of these banks providing loans to small and medium-sized companies to grow and hire more employees.
A drastic recalibration by investors to what the Fed will do with interest rates has caused a historic shift in the bond market. The yield there has plunged since the beginning of this month.
Consider the two-year Treasury, which tends to move closely with expectations for the Fed. Yields rose more than 5% earlier this month, at their highest level since 2007, after inflation data and other economic measures remained higher than expected.
Last week it fell below 4%, which is a big step for the bond market. It rose to 3.92% from 3.84% last Friday.
In overseas markets, stocks were higher in Europe after falling in much of Asia.