S&P 500 inches down while bank stocks dive head first
Nasdaq ends up ~0.5%, S&P dips ~0.2%, Dow drops ~0.3%
Bank stocks tumble after three failures
Financials weakest S&P 500 sector; real estate leads gainers
Dollar off; crude down ~3%; gold up >2%; BTC= up ~21%
U.S. 10-Year Treasury yield collapses to ~3.55%
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S&P 500 INCHES DOWN WHILE BANK STOCKS DIVE HEAD FIRST (1605 EST/2005 GMT)
While its bank stocks fell through the floor on Monday the benchmark S&P 500 .SPX closed down just 0.15% and the Nasdaq added 0.5% as many investors appeared to focus on prospects that the Federal Reserve would slow or even stall its interest rate hikes following the failure of three banks in recent days.
After the collapse of Signature Bank SBNY.O, SVB Financial SVB.N and Silvergate SI.N traders switched their bets to a March rate hike of 25 basis points (bps) compared with broad expectations for 50bps just days before. Some strategists said they now expect no hikes this month.
Also, it helped that the U.S. Treasury said depositors would be fully protected and the Federal Reserve announced a new bank lending facility to help banks meet depositor demands and avoid possible run-on-the-bank dynamics.
All this gave investors enough re-assurance to dip into at least some market sectors such as defensive real estate .SPLRCR and utilities .SPLRCU. However, it was not enough to stop the exodus from financial sector shares except for a tiny group of companies benefit from volatile markets.
With memories of the 2008/2009 financial crisis roaring back, regional banks were hardest hit with the SPDR S&P regional bank ETF KRE.P, closing down 12.3% while the S&P 500 banks index .SPXBK finished down 6.99%, its biggest one-day drop since June 2020 after already tumbling 11.5% last week, which was its biggest weekly decline since March 2020.
The hardest hit S&P 500 bank was First Republic FRC.N, closing down 61.8%. Three other banks in benchmark index lost more than 25% of their value. The biggest banks were not immune with Citigroup C.N and Wells Fargo WFC.N losing >7%. Top S&P bank performer JPMorgan JPM.N finished down 1.8%.
Brad McMillan, chief investment officer for Commonwealth Financial Network, doesn't expect a re-run of the great financial crisis because he said: "unlike in 2008, the government has stepped in early and stepped in hard."
But he took the bank failures as a sign rate hikes are "indeed affecting the financial system," and not just SVB.
"Expect to see banks and the financial sector as a whole pull back on lending and risk until they get their houses in order, and this will slow economic growth and likely pull markets down," said McMillan.
While in some ways this is what the Fed had expected from rate hikes, the strategist warned that "it makes a recession much more likely, quite possibly in the short term."
The Russell 2000 small cap index .RUT fell 1.6% and the economically-sensitive Dow Transports .DJT lost 1.7%.
As recently as Thursday, investors thought the biggest item on this week's agenda would be inflation data starting with the Consumer Price Index (CPI) due out on Tuesday.
Here is your closing snapshot:
(Sinéad Carew)
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DOLLAR NO SAFE HAVEN AS BANKS COME UNDER PRESSURE (1402 EDT/1802 GMT)
The dramatic drop in Treasury yields and steepening of the Treasury yield curve is negative for the dollar, with safe haven currencies the Swiss Franc and Japanese yen more likely the beneficiaries of risk aversion stemming from the collapse of two regional banks, according to ING.
Emergency measures by the United States to guarantee bank deposits have failed to reassure markets after Silicon Valley Bank SIVB.O collapsed late last week and the state took over Signature Bank SBNY.O on Sunday.
“One clear read for the market is that the Fed is not going to be able to deliver a 50bp hike on 22 March if, at the same time, it is introducing new liquidity measures for the US banking system,” ING analyst Chris Turner said in a report.
“For FX this means the following. The first major US financial crisis since 2008 has seen a significant bullish disinversion of the US yield curve - which is dollar bearish,” he added.
ING had anticipated that a disinverting yield curve would be needed to send the greenback lower, but they had expected that the move would come from U.S. disinflation or weak activity data, rather than a crisis in financial companies.
Now, “expect investors to remain wary this week and continue to prefer the CHF and JPY over the dollar,” ING said. “In a way, we are going back to former periods of risk aversion - when selling the dollar and buying US two-year Treasury notes was the key strategy in a crisis.”
(Karen Brettell)
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SHARES OF DOZENS OF REGIONAL BANKS GETTING SLAMMED(1338 EDT/1738 GMT)
The bloodbath in regional bank shares caused by the recent failure of Silicon Valley Bank is spilling into many of the industry's smallest players.
After regulators closed New York-based Signature Bank SBNY.O on Sunday, two days after California authorities shuttered Silicon Valley Bank, owned by SVB Financial SIVB.O, the S&P 500 regional banks index .SPLRCBNKS is tumbling 15%.
With investors worried about more potential bank failures, shared in some of the country's biggest regional banks were under pressure. First Republic FRC.N was losing >65% of its value, while Zions Bancorporation ZION.O was down 24% and Keycorp KEY.N was off 29%. Comerica CMA.N was down >31%.
S&P 500's regional banks index is made up of 13 banks, including now shuttered SVB and Signature.
However, close to 500 U.S.-based regional banks are publicly traded on Wall Street, including some traded over the counter, according to Refinitiv data.
Of those banks, about 230 have market capitalizations between $100 million and $1 billion, and those banks on Monday suffered a median share loss of over 4%, according to Refinitiv data.
Among those smaller regional banks, Metropolitan Bank Holding Corp MCB.N dropped 40%, leaving it with a stock market value of about $284 million. Customers Bancorp Inc CUBI.N and First Foundation Inc FFWM.O each dropped more than 25%, leaving them each with stock market values below $500 million.
(Noel Randewich)
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S&P 500 INDEX BOUNCES OFF SUPPORT (1253 EDT/1653 GMT)
The S&P 500 .SPX tested support early in the session. The benchmark index has since bounced, and is now posting a modest rise on the day:
The SPX hit a low of 3,808.86. With this, it tested the 38.2% Fibonacci retracement of the March 2020-January 2022 advance at 3,815.20.
This level proved to be resilient in May of last year and again in late December into early January of this year.
After hitting its low in the first 10 minutes or so of Monday's session, the S&P 500 snapped higher, and is attempting to reclaim a broken resistance line from the January 2022 high which presents a hurdle around 3,890.
The SPX, after registering an intraday high for the session so far of 3,905.05, is now around 3,875, putting it back below this hurdle.
Additional resistance is at the March 2 low at 3,928.18 and the 200-day moving average, now around 3,940.
Meanwhile, after falling ~14%, the SPDR S&P 500 Banks ETF KBE.P is now off ~8.5% while the SPDR S&P regional banking ETF KRE.P was down ~10% after earlier falling >17%.
(Terence Gabriel)
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TOO LATE TO MEND, EVEN IF THE FED HITS A U-TURN?(1205 EDT/1605 GMT)
The sudden collapse of SVB Financial Group SIVB.O and the failure of two other banks this week has taken global financial markets by the throat, has left analysts saying that even a pause button by the Federal Reserve on its aggressive monetary policy tightening may not be enough to salvage the economy.
"Fed policy is starting to bite, and it's unlikely to reverse even if the Fed were to pause its rate hikes or quantitative tightening- the die is cast for further earnings disappointments," Morgan Stanley analysts pointed.
SVB, a startup-focused lender became the largest bank to fail since the 2008 financial crisis on Friday, leaving billions of dollars belonging to companies and investors stranded, while regulators also closed New York-based Signature Bank SBNY.O over the weekend. This followed crypto-bank Silvergate's announcement days before that it would have to wind down.
Higher interest rates have been seen as a win for banks because of the boost to net interest margins, but coupled with slower economic growth, higher rates can also trigger loan losses, AJ Bell's investment director Russ Mould said.
In particular, B Riley Wealth's Art Hogan warned that the SVB fallout implies risks to the balance sheets of regional banks from the higher rate regime.
Hogan pointed that the market's main focus is to examine the whole group regional banks group closely to determine the ones with most negative exposure.
Stocks across the entire financial sector were falling on Monday. Charles Schwab Corp SCHW.N shares were down 9% after it reported quarterly results. Zions Bancorp ZION.O was down 20%. KeyCorp KEY.N was down 22%. Comerica Inc CMA.N was down 21% and Truist Financial Corp TFC.N was off ~13% while and Fifth Third Bancorp FITB.O was down ~16%.
First Republic Bank FRC.N was halted multiple times for volatility with the stock last down more than 60% as news of fresh financing failed to reassure investors. The stock had already lost 33% of its value last week.
While the Fed's intervention to backstop all uninsured deposits could help prevent any further bank runs, the bigger picture of slowing growth remains intact, Morgan Stanley analysts noted.
The cost to banks of keeping deposits are likely to be under more pressure after already being on the rise for months, they added.
(Ankika Biswas)
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FED FUNDS/TWO-YEAR YIELD INVERSION REFLECTS CLOUDY FED OUTLOOK (1050 EDT/1450 GMT)
The dramatic drop in U.S. Treasury yields as investors seek out safe havens in the aftermath of three U.S. bank failures in the last few days has inverted the curve between the fed funds rate and two-year Treasury yields and clouded the outlook for Federal Reserve policy.
Two-year yields US2YT=RR dropped as low as 4.00% on Monday and are down from a more-than-15-year high of 5.08% last Wednesday. They are now trading 57 basis points below the fed funds rate USONFFE= at 4.57%.
Such a move “has historically marked the end of the post-hiking Fed pause; certainly not a dynamic consistent with a Fed poised to deliver several more hikes before arriving at terminal,” Ian Lyngen and Benjamin Jeffery, interest rate strategists at BMO Capital Markets, said in a note on Monday.
Fed funds futures traders now see the Fed as equally likely to leave rates unchanged or hike rates by 25 basis points at its March 21-22 meeting, after pricing for a 50 basis points rate increase just last week. Traders also again expect rate cuts in the second half of the year, with the fed funds rate expected to fall to 4.06% in December. FEDWATCH
Fed Chairman Jerome Powell said last week that the U.S. central bank might reaccelerate the pace of rate hikes as it battles still high inflation and benefits from a still strong employment picture.
“The most relevant question of the moment is whether the banking sector stresses are enough to prevent Powell from hiking next week. The Fed has previously been clear in the stance that investors should anticipate fallout from the cumulative tightening of financial conditions and, despite the solid start to 2023 for the real economy, the path to a soft (or even no) landing was comparatively narrow,” BMO said.
However, “the simple fact the damage has hit the banking sector complicates the calculus for the Fed. Said differently, in the event the Fed pauses, it will be due to the potential for broad-based banking contagion,” they added.
Bank shares tumbled on Monday as the United States' move to guarantee the deposits of the collapsed tech-focused lender Silicon Valley Bank failed to reassure investors that other banks remain financially sound.
(Karen Brettell)
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BANKS LEAD DECLINES AS INVESTORS FLEE AFTER THREE FAILURES (1010 EDT/1410 GMT)
Wall Street's major averages were gyrating around flat early on Monday after a third U.S. bank failed over the weekend and investors sold off bank stocksas they worried whether more weakness would be uncovered in the financial system.
State regulators closed New York-based Signature Bank SBNY.O on Sunday, two days after California authorities shuttered Silicon Valley Bank, owned by SVB Financial SIVB.O and Silvergate Capital's announcement on Wednesday that it would have to wind downits operations.
With concern spreading after the closures, U.S. President Biden tried to reassure the public saying the administration's actions to help depositors in SVB and Signature should give Americans confidence that the banking system is safe.
"Things are moving at warp speed. The market seems to think there is going to be more stress. The question is at what point do they become self-fulfilling? When you start seeing lines outside of banks," said Christopher Mcgratty, head of U.S. bank research at Keefe, Bruyette & Woods in New York
"I've seen this narrative play out in 2008 and markets can be unwound fairly quickly."
While the S&P 500 .SPX was down 0.3% the benchmark's bank index .SPXBK tumbled 7.3% with the biggest decliner First Republic Bank FRC.N, which was down 74.3% after already losing 33% of its value last week. The best performer in the index was JPMorgan JPM.N which was down 0.9%.
Regional banks were bing hit hardest with the KBW regional bank index .KRX down 11.2%.
If there was any consolation to be had it was that traders were pulling back expectations for Federal Reserve rate hikes.
Here is a snapshot of indexes at 1006 AM EST:
(Sinéad Carew, Medha Singh)
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BANK BLOODBATH: WILL THIS BE THE VOLATILITY EVENT? (0845 EDT/1245 GMT)
U.S. equity index futures are in negative territory on Monday in volatile trade.
At one, point, e-mini S&P 500 futures EScv1 were up about 2%. However, that rise has evaporated, and the futures are now off around 1%. Bank shares remain under pressure. The SPDR S&P Bank ETF KBE.P is quoted down around 6%.
With this, the U.S. 10-Year Treasury yield US10YT=RR is collapsing, and the CBOE market volatility index .VIX is jumping back to the 30.00 area, hitting its highest level since October 24.
Since peaking early on in the bear market at 38.94 in late January of last year, the market's "fear gauge" has consistently made lower highs:
Many market watchers have been looking for a volatility event leading to capitulation to call a market bottom, and perhaps rightly so. With this, they are expecting a wild spike higher in the VIX, to extreme levels, to signal the end of the decline.
Of note, however, the pattern which is already in place of lower VIX highs against lower SPX lows can also potentially fit with a bottoming process.
Looking back from 1996 to 2020, on an intraday basis, there were 12 major S&P 500 declines: six corrections (-10% to -20%) and six bear markets (-20%+). In only four of those instances (33% of the time), did the day of the VIX intraday high coincide with the day of the S&P 500 intraday low. In other words, in a sign of complete capitulation, the VIX topped the same day the SPX hit its low.
In eight instances (67% of the time), the VIX intraday high occurred ahead of the S&P 500's intraday low. In fact, on average, on the day of the SPX's ultimate low, the VIX high that day was around 86% of its highest print seen for the decline.
Additionally, in terms of time, on average, the high in the VIX occurred around 77% of the way through the decline.
Therefore, one could argue that more often than not, the SPX bottomed past the point of "maximum fear," when the market was gripped with a sense of "despair."
Admittedly, the current decline from a record high has only produced a maximum VIX intraday high of 38.94, which is well below the average maximum high of about 51 in prior declines.
Thus, there still might be a crescendo of panic ahead.
(Terence Gabriel)
*****
FOR MONDAY'S LIVE MARKETS POSTS PRIOR TO 0845 EDT/1245 GMT - CLICK HERE
SPXVIX03132023https://tmsnrt.rs/3ZJgLSS
S&P pares losses but banks deep in redhttps://tmsnrt.rs/3YKwAaC
SPX03132023https://tmsnrt.rs/3Fk3t75
S&P falls slightly while bank stocks tumblehttps://tmsnrt.rs/426ziKq
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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