Stocks fall as First Republic squeezes banks

Stocks lost ground in early trading on Friday as banks came under pressure a day after a consortium of 11 major US banks pooled a $30 billion deposit into First Republic (FRC) to stabilize the banking system.

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

After a negative opening, investors reacted positively to the day’s biggest economic data point, the University of Michigan’s preliminary consumer sentiment, which showed inflation expectations fell to the lowest level since April 2021.

The report also noted that its survey was 85 percent complete at the time of the Silicon Valley Bank failure, meaning consumers would not react to the event until later this month. Tech stocks initially rose on the news, as lower inflation expectations could signal less aggressive Fed rate hikes, which is good for tech stocks.

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

Shares had rallied Thursday after news spread throughout the day that major banks led by JPMorgan ( JPM ) and Bank of America ( BAC ) planned to inject capital into First Republic, marking a bailout for the struggling banking industry.

The companies finally announced an agreement to block First Republic about half an hour before the market closed.

Speaking to Yahoo Finance Live on Thursday, longtime banking analyst Dick Bove said after these moves, the near-term banking crisis is “finished.”

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

The headquarters of First Republic Bank is seen on March 16, 2023 in San Francisco, California, USA. (Photo: Tayfun Cosku/Anadolu Agency via Getty Images)

Investors also followed the price of crude oil. WTI crude fell nearly 3% to near $66.40 a barrel, a near 15-month low, as oil prices have come under intense pressure in the past week.

Treasury markets also remain a focus, with the 10-year yield near 3.48% early Friday, just over a week after topping 4%.

In a note to clients on Thursday, analysts at Bespoke Investment Group emphasized that some of the recent volatility in the treasury market — particularly with short-term Treasuries, which tend to be more sensitive to Fed expectations — likely stems from “compulsory (that is, non-discretionary) buying and selling, and not prices , to which price-sensitive buyers or sellers agree, may not contain all available information.”

“Another example is the huge cash flow into money market funds reported by ICI this week: total fund assets increased by 2.5%, or $121 billion, and funds are forced to put cash to work, adding to short-term interest buying pressure,” the company wrote. “Falling bill yields and very high volatility are consistent with the idea that cash flows are forcing buying in certain markets.”

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

“We think there’s a good chance that investors are now underestimating how much central bankers will raise interest rates over the next couple of months,” Mathews wrote. “That’s why we suspect the rally in short-dated bonds will reverse.”

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

Friday also marks a quadruple witch for US markets, with single-stock options and futures contracts and index options and futures ending today.

Some sectors of the S&P 500 are also undergoing realignment, with S&P reclassifying 14 stocks in the index into new sectors by the end of today.

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

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