Stocks lower as First Republic weighs on banks

Stocks lost momentum early in Friday’s trading session as banks came under pressure the day after a consortium of 11 major U.S. banks banded together to pour $30 billion into First Republic (FRC) in a bid to stabilize the banking system.

At about 10:50 AM ET, stocks were trading near the lows of the session, with the S&P 500 (^GSPC) up 1.2% and the Dow Jones Industrial Average (^DJI) up 1.4%. The tech-heavy Nasdaq Composite (^IXIC) fell 1% after spending some time in green numbers earlier in the trading session.

After a negative open, investors reacted positively to the biggest economic data point of the day, the University of Michigan’s preliminary consumer confidence reading, which showed inflation expectations falling to their lowest level since April 2021.

The report also stated that the investigation was 85% complete at the time of Silicon Valley Bank’s bankruptcy, meaning the first consumer reactions to that event won’t start rolling in until later this month. Tech stocks initially rallied higher on this news as lower inflation expectations may point to less aggressive rate hikes by the Fed, which is good for tech stocks.

Shortly after this surge, tech stocks followed the S&P 500 and the Dow into the red.

Shares were rallied Thursday after news broke all day that major banks led by JPMorgan (JPM) and Bank of America (BAC) would inject First Republic with capital in what amounted to an industry bailout of the struggling bank .

The firms finally announced their deal to backstop First Republic about half an hour before market close.

Speaking to Yahoo Finance Live on Thursday, longtime banking analyst Dick Bove said that after these steps, the banking crisis will be “over” in the near term.

Shares of First Republic, which were halted multiple times on Thursday due to volatility, fell about 20% early Friday along with the broader banking sector.

The First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)

Investors also followed the price of crude oil, with WTI crude falling nearly 3% to nearly $66.40 a barrel, a roughly 15-month low as oil prices took a heavy hit over the past week.

The Treasury market will also continue to be a focus, with a 10-year yield reaching nearly 3.48% early Friday, just over a week after peaking at 4%.

In a note to clients on Thursday, Bespoke Investment Group analysts highlighted how some of the recent volatility in the Treasury market — particularly with shorter-term Treasuries typically more sensitive to Fed expectations — likely stems from “forced ( that is, non-discretionary) buying and selling, and the prices agreed upon by price-insensitive buyers or sellers do not necessarily reflect all available information.”

Another example is the massive inflow of money into money market funds this week, reported by ICI: the fund’s total assets increased by 2.5% or $121 billion, and money funds are forced to put that money to work, which contributes to the buying pressure at short-term interest rates.” the company wrote. “Plunging account returns and very high volatility are consistent with the idea that the money fund flows are forcing purchases in specific markets.”

In a note to clients on Friday, Thomas Mathews, senior market economist at Capital Economics, reiterated this view, noting that the front end of the Treasury curve now implies that the Fed’s benchmark rate will be about 2 percentage points lower in 2023 than where investors expected just a week ago.

“We believe investors are now underestimating how much central bankers will raise interest rates in the coming months,” Mathews wrote. “As such, we suspect the rally could turn in short-dated bonds.”

The Fed will announce its next policy decision on Wednesday, March 22, with investors estimating about an 80% chance that the central bank will raise rates by another 0.25%, according to CME Group data.

Friday also marks quadruple witches in US markets, with contracts on individual stock options and futures, as well as index options and futures, all expiring at today’s closing price.

There will also be a rebalancing in some sectors of the S&P 500, with S&P reclassifying 14 stocks in the index into new sectors as of today’s close.

The most notable names on the move are Target (TGT), Dollar General (DG), and Dollar Tree (DLTR), which will move from the Consumer Discretionary (XLY) sector to Consumer Staples (XLP). Other notable companies moving industries include Visa (V), Mastercard (MA), and PayPal (PYPL), moving from Technology (XLK) to Financials (XLF).

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