Shares were losing steam at the start of Friday’s trading session as banks found themselves under pressure the day after a consortium of 11 major American banks had come together drop $30 billion into the First Republic (FRC) in order to stabilize the banking system.
Around 10:50 a.m. ET shares were trading near session lows, with the S&P 500 (^GSPC) down 1.2% and the Dow Jones Industrial Average (^ DJI) by 1.4%. The Nasdaq Composite (^IXIC) fell 1% after spending some time in the green numbers earlier in the trading session.
After a negative open, investors reacted positively to the biggest economic data point of the day, the preliminary reading on consumer sentiment from the University of Michigan, which showed inflation expectations falling to their lowest point. level since April 2021.
The report also noted that its investigation was 85% complete at the time of the Silicon Valley Bank failure, meaning the first consumer reactions to the event won’t be felt until later this month. Tech stocks initially rose on the news as lower inflation expectations potentially signal less aggressive rate hikes from the Fed, which is good for tech stocks.
Shortly after this rise, tech stocks followed the S&P 500 and the Dow into the red numbers.
The shares had rebounded strongly on Thursday after news broke throughout the day that major banks led by JPMorgan (JPM) and Bank of America (BAC) were to infuse the First Republic with capital in what amounted to a bailout of the struggling banking industry.
The companies finally announced their agreement to support the First Republic about half an hour before the market closed.
Talk with Yahoo Finance Live Thursdaylongtime banking analyst Dick Bove said that as a result of these measures, the short-term banking crisis was “over”.
First Republic stocks, which were repeatedly halted by volatility on Thursday, were down about 20% early Friday, as was the broader banking sector.
Investors were also watching the price of crude oil, with WTI crude down nearly 3% to trade near $66.40 a barrel, a roughly 15-month low as oil prices were under a lot of pressure last week.
The Treasury market will also remain in focus, with the 10-year yield standing near 3.48% early Friday, just over a week after rising above 4%.
In a note to clients on Thursday, analysts at Bespoke Investment Group highlighted how some of the recent volatility in the Treasury market – particularly with shorter-dated Treasuries which tend to be more sensitive to Fed expectations – probably came from “forced (that is, non-discretionary buying and selling, and prices that price-insensitive buyers or sellers agree to do not necessarily incorporate all available information.”
“Another example is the massive inflow of liquidity into money market funds this week reported by ICI: Total fund assets increased by 2.5% or $121 billion, and money market funds are forced to put that cash to work, adding to the buying pressure of short interest rates term,” the company wrote. “Collapsed bill yields and very high volatility are consistent with the idea that flows of money funds are forcing purchases in specific markets.”
In a note to clients on Friday, Thomas Mathews, senior markets economist at Capital Economics, echoed that view, noting that the start of the Treasury curve now implies the Fed’s benchmark interest rate ending. in 2023 about 2 percentage points below where investors expected just one a week ago.
“Chances are, in our view, that investors are now underestimating how much central bankers will raise rates over the next two months,” Mathews wrote. “As such, we suspect the rally in short-term bonds may reverse.”
The Fed will announce its next policy move on Wednesday, March 22, with investors predicting a roughly 80% chance the central bank will raise rates another 0.25%, according to CME Group data.
Friday also marks a quadruple witchcraft in US markets, with single stock options and futures, as well as index options and futures, all expiring at today’s close.
There will also be a reshuffling in some sectors of the S&P 500, with S&P reclassifying 14 stocks in the index into new sectors at today’s close.
The most notable names on the move include Target (TGT), General dollar (CEO) and Dollar Tree (LTRD), which will shift from discretionary consumption (XLY) of the consumer staples sector (XLP). Other notable companies moving across sectors include Visa (V), MasterCard (MY) and PayPal (PYPL), which will change from Technology (XLK) in finance (XLF).
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