Stocks fall as First Republic weighs on banks

Stocks lost steam early in Friday’s trading session as banks came under pressure a day after a consortium of 11 major US banks joined forces to pay $30 billion into First Republic (FRC) in a bid to stabilize the banking system.

Close to At 10:50 a.m. ET, the stock was trading 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 on green numbers earlier in the trading session.

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

The report also noted that its investigation was 85% complete at the time of Silicon Valley Bank’s failure, meaning the first reactions to that event from consumers won’t come in until later this month. Tech stocks initially moved higher on this news as lower inflation expectations potentially signal less aggressive Fed rate hikes, which is good for tech stocks.

Shortly after this rise, technology stocks followed the S&P 500 and the Dow in the red.

Shares were up sharply Thursday after news broke during the day that major banks led by JPMorgan ( JPM ) and Bank of America ( BAC ) were set to inject capital into First Republic in what amounted to an industry bailout for the struggling bank.

The companies eventually announced their agreement to stop First Republic about half an hour before the market close.

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

Shares of First Republic, which were halted due to volatility several times Thursday, fell 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 by Tayfun Coskun/Anadolu Agency via Getty Images)

Investors also followed the price of crude oil, with WTI crude oil down nearly 3% to trade near $66.40 a barrel.

The Treasury market will also remain in 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 highlighted how some of the recent financial market volatility — particularly with shorter Treasuries that tend to be more sensitive to Fed expectations — likely came from “forced (to be , without discretion) purchases and sales, and the prices agreed upon by price-insensitive buyers or sellers do not necessarily incorporate all available information.”

“Another example is the massive inflow of cash into money market funds this week reported by ICI: total fund assets rose by 2.5% or $121 billion, and money funds are forced to put the money to work, increasing the short-term interest rate buying pressure.”, the firm wrote. “Collapsing exchange rates and very high volatility are consistent with the idea that money fund flows are forcing buying in specific markets.”

In a note to clients on Friday, Thomas Mathews, senior market economist at Capital Economics, echoed that view, noting that the front end of the yield curve now implies the Fed’s benchmark interest rate will end 2023 about 2 percentage points below where investors expected just one a week ago.

“There is a good chance, in our view, that investors are now underestimating how much central bankers will raise interest rates over the next few months,” Mathews wrote. “As such, we suspect that the rise in short-term bonds may go in the opposite direction.”

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

Friday also marks quadruple witching in US markets, with contracts on single stock options and futures as well as index options and futures all expiring at the close of the day.

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

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

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