First Republic: US stocks rally after 11 banks including JP Morgan, Citi and Goldman stump up $30bn in rescue effort
US stocks rallied on Thursday after a group of big banks offered a lifeline to the bank that investors had zeroed in on in their hunt for the industry’s next victim.
The S&P 500 jumped 1.8 per cent for its best day in nearly two months after 11 of the biggest banks said they would deposit a combined 30 billion dollars into First Republic Bank.
The Dow Jones Industrial Average erased an early loss of 300 points to climb 371 points, or 1.2 per cent, while the Nasdaq composite jumped 2.5 per cent.
This week has been a whirlwind for markets globally on worries that banks may be bending under the weight of the fastest set of hikes to interest rates in decades.
The concerns have been flaring since Friday’s collapse of Silicon Valley Bank, which was the second largest bank failure in US history.
Since then, Wall Street has tried to root out banks with similar traits, such as lots of depositors with more than the 250,000 dollars limit that is insured by the Federal Deposit Insurance Corp, or lots of tech start-ups and other highly connected people that can spread worries about a bank’s strength quickly.
First Republic Bank has been at the centre of the market’s swivels, and it rose 10 per cent on Thursday after slumping as much as 36 per cent early in the day.
In the statement announcing their deposits, the group of 11 banks said the move “reflects their confidence in First Republic and in banks of all sizes”.
This includes Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY-Mellon, PNC Bank, State Street, Truist and U.S. Bank
Besides stocks, Treasury yields also strengthened suddenly following the first reports of a possible rescue by the industry. That was a sign of increased confidence from the bond market.
The Bank o England and Treasury have been approached for comment.
Following the collapse of tech industry’s Silicon Valley Bank, fears of contagion in the UK led to HSBC taking on its UK arm for just one pound.
Will it impact Europe?
Across the Atlantic, European stocks rose after the European Central Bank announced a hefty increase to interest rates. Concerns there were also easing about another bank, Credit Suisse, which helped cause markets to tumble sharply on Wednesday.
With the meeting taking place amidst a nervous backdrop in the banking sector, ECB President Christine Lagarde said “there is no trade off between price stability and financial stability”.
The Swiss bank has been battling troubles for years, but its plunge to a record low raised concerns just as more attention was shining on the wider industry.
Credit Suisse’s stock in Switzerland leaped 19.2 per cent Thursday after it said it will strengthen its finances by borrowing up to 50 billion Swiss francs (£45 billion) from the Swiss National Bank.
Much of the damage for banks is seen as the result of the Federal Reserve’s fastest barrage of hikes to interest rates in decades. They have shocked the system following years of historically easy conditions in hopes of driving down painfully high inflation.
Higher rates can tame inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That latter factor was one of the issues hurting Silicon Valley Bank because high rates forced down the value of its bond investments.
US Treasury Secretary Janet Yellen told a Senate committee on Thursday that the nation’s banking system “remains sound” and Americans “can feel confident” about their deposits.
Impact on rate hike
Wall Street increasingly expects this week’s turmoil to push the Federal Reserve to hike interest rates next week by only a quarter of a percentage point.
That would be the same sized increase as last month’s, and it would be counter to expectations from earlier this month for a hike of 0.50 points, as it had been potentially signalling.
The European Central Bank on Thursday raised its key rate by half a percentage point, brushing aside speculation that it may reduce the size because of all the turmoil around banks.
Some of Wall Street’s wildest action this week has been in the bond market, as traders rush to guess where the Fed is heading.
The yield on the 10-year Treasury rose to 3.57 per cent from 3.47 per cent late on Wednesday. Earlier in the day, it dropped as low as 3.37 per cent and has been veering sharply since climbing above 4 per cent earlier this month. It helps set rates for mortgages and other important loans.
All the stress in the banking system has raised worries about a potential recession because of how important smaller and mid-sized banks are to making loans to businesses across the country. Oil prices have slid this week on such fears.
Reports on the US economy, meanwhile, continue to show mixed signals.
Jobs market remains mixed
The job market looks remarkably solid, and a report said fewer workers applied for unemployment benefits last week than expected.
But other pockets of the economy are continuing to show weakness. Manufacturing has struggled, for example, and a measure of activity in the mid-Atlantic region weakened by more than forecast.
The housing market has also struggled under the weight of higher mortgage rates, though homebuilders broke ground on more projects last month than expected. That could be a signal the industry is finding some stability.
All told, the S&P 500 rose 68.35 points to 3,960.28. The Dow gained 371.98 to 32,246.55, and the Nasdaq jumped 283.22 to 11,717.28.
Press Association – Stan Choe, Associated Press